The Bank of England has held interest rates unchanged at 3.75% even while projecting that inflation will fall “much more than expected” in the coming months. This steeper decline is largely attributed to government policy measures taking effect in April.
The monetary policy committee’s 5-4 vote to maintain rates, despite the improved inflation outlook, reflects caution about ensuring price stability is sustainable. Four members believed the better forecast already justified immediate easing, while five preferred to wait for confirmation that inflation is genuinely under control. This division follows six rate cuts since mid-2024.
Governor Andrew Bailey emphasized the dramatic improvement in inflation prospects, stating it would fall to around 2% by spring. The Bank now expects inflation to decline to 2.1% by the second quarter of 2026, well below the 3.4% recorded in December and comfortably close to the 2% target. This represents a much steeper decline than previously anticipated.
The sharper-than-expected fall in inflation is largely due to Chancellor Rachel Reeves’s budget measures. Her package includes utility bill cuts and rail fare freezes, both effective from April, which will significantly reduce cost-of-living pressures. Yael Selfin, chief economist at KPMG, confirmed that “the downward revision in inflation largely reflects the impact of the measures announced in the autumn budget.”
Despite the positive inflation news, economic growth forecasts have been revised down to 0.9% for this year from 1.2% previously, while unemployment is expected to reach 5.3%. This weaker economic outlook, combined with falling inflation, creates conditions favorable for future rate cuts. However, the committee’s decision to hold rates this time suggests policymakers want to see evidence that the forecast improvements materialize before proceeding with additional easing.