Bank of England Set to Hold Rates as Inflation Remains the Priority
The Bank of England is widely expected to keep its benchmark interest rate unchanged at 3.75% when it delivers its policy decision on February 5.
Key takeaways
- The Bank of England is expected to hold rates at 3.75% on February 5, with inflation still the main focus despite rising unemployment.
- UK unemployment is near a five-year high at 5.1%, but policymakers see no urgency to cut rates.
- Markets are pricing in almost zero chance of a move this week, with only one cut expected later this year.
Despite growing signs of economic cooling, policymakers appear set to maintain a cautious stance as inflation control remains the top priority.
Labor Market Weakness Raises Internal Debate
Unemployment in the UK is hovering near a five-year high, holding at 5.1% in the three months through November. That level was last seen in early 2021 and suggests joblessness ended 2025 above the central bank’s November projection of 5%. Within the Monetary Policy Committee, this has triggered debate over whether the weakening labor market reflects a manageable slowdown or something more structurally concerning.
Even with unemployment elevated, inflation dynamics continue to dominate the policy discussion. The central bank expects inflation to ease back toward its 2% target next quarter, reinforcing the case for patience. Minutes from the December meeting showed a divided committee, but one that agreed to slow the pace of policy changes unless there is a clear and unexpected shift in economic conditions.
Markets See No February Move
Financial markets are firmly aligned with a hold decision. Traders are assigning virtually zero probability to a rate change this week and are only fully pricing in one additional cut later this year. The current pricing reflects confidence that the Bank of England will not risk easing policy prematurely while inflation risks still linger.
The broader economic outlook has also shown little change. Bloomberg expects the UK economy to grow by 1.2% in 2026, a forecast that suggests policymakers see no immediate need to reassess their medium-term view, even as labor market conditions soften.
Additional Context From the United States
Developments in the US last week added to the global backdrop of caution. The Federal Reserve held interest rates steady, signaling that it too is in no rush to pivot toward easing.
US wholesale inflation came in stronger than expected, with producer prices rising 0.5% in December, the biggest increase in three months. The data point to companies increasingly passing on tariff-related costs, raising the risk that inflation pressures could remain elevated. At the same time, initial unemployment claims fell by 1,000 in the week ending January 17, coming in lower than expected and highlighting continued resilience in the US labor market.
Together, these signals help explain why the Bank of England and other major central banks remain reluctant to move quickly on rate cuts, even as growth slows and labor markets show signs of strain.
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