The Bank of England held interest rates at 3.75% after an increase in inflation in December and positive economic indicators in January. The Monetary Policy Committee voted 5-4 in favor of the rate hold, with expectations for the only rate cut of the year to occur in April to bring inflation back to the 2% target.

Governor Andrew Bailey predicts a significant drop in inflation over the coming months, with further rate cuts expected in 2026 as inflation falls. The MPC is divided on labor market and wage data interpretation, citing concerns about services inflation and wage inflation as reasons for holding off on rate cuts this year.

The Bank of England is cautious on interest rates, with fund managers noting signs of caution in the Bank’s messaging. The split among MPC members shows differing assessments on progress in bringing down inflation, with expectations for two interest rate cuts in upcoming meetings as inflation gradually recedes.

Market strategists believe the case for rate cuts is clear, with the MPC showing confidence in achieving its inflation goal. The next meeting is seen as crucial, with expectations for a March rate cut as data trends towards higher unemployment, falling payrolls, and slower wage growth, leading to potential policy shifts.

The UK economy remains weak, with rising unemployment and upcoming tax changes impacting businesses, savers, and homeowners in April. GDP growth is expected to slow from 1.5% in 2025 to 1.1% in 2026, prompting calls for stimulus from the Bank of England to support economic growth amid lackluster conditions.

Political risk has emerged as a factor affecting UK inflation, with uncertainties surrounding political leadership potentially leading to fiscal policy changes and geopolitical factors influencing the Bank’s cautious approach. A crisis involving UK Prime Minister Keir Starmer could result in major policy shifts, impacting monetary policy decisions.

Read more at Morningstar: Bank of England Holds Interest Rates at 3.75%