Bank of England holds interest rates at 3.75% and cuts growth forecast: What you need to know

Need to know

Rate-setters see inflation easing and say more cuts could follow

The Bank of England has kept interest rates on hold

• The Bank of England’s Monetary Policy Committee (MPC) has voted to keep interest rates on hold at 3.75% and says the rate is likely to come down soon as inflation eases.
• The rate-setting committee voted by a majority of 5–4 to maintain the Bank Rate at its current level, though four members voted to reduce it by 0.25 percentage points, to 3.5%.
• The Bank has also cut its outlook for UK economic growth for 2026, from 1.2% to 0.9%, and for 2027, from 1.6% to 1.5%.
• The Bank said today that while CPI inflation is currently above the 2% target, it “is expected to fall back to around the target from April, owing to developments in energy prices including from Budget 2025”. The Bank added that labour market, pay growth and services price inflation have continued to ease although “some risks to inflation from weaker demand and a loosening labour market remain”.
• The Bank added: “On the basis of the current evidence, Bank Rate is likely to be reduced further. Judgements around further policy easing will become a closer call. The extent and timing of further easing in monetary policy will depend on the evolution of the outlook for inflation.”
• Bank of England Governor Andrew Bailey said: “I expect to see quite a sharp drop in inflation over coming months. While I am more confident in the overall path of wage disinflation, it is naturally less clear when and how much the expected upcoming drop in inflation will influence wage settlements. Overall, the risks from inflation persistence appear to have continued to reduce. I therefore see scope for some further easing of policy.”
• The MPC last delivered a cut to borrowing costs before Christmas, from 4% to 3.75%. It was the fourth reduction of the year, with Mr Bailey saying that while the UK had “passed the recent peak in inflation and it has continued to fall”, further cuts would be a “closer call”.
• Since that decision, official data showed inflation bounced back in December, rising for the first time in five months. The Consumer Prices Index (CPI) inflation rate was 3.4% for the month, up from 3.2% in November, driven up by tobacco duties and airfares.
• It’s also being reported today that Britain’s construction sector has shown signs of pulling out of its “tailspin”, though the housebuilding sector remains under pressure. The latest S&P Global UK construction purchasing managers’ index (PMI) showed a reading of 46.4 for January, up from December’s five-and-a-half-year low of 40.1 and the best result since June last year. But the reading remained below the 50 threshold, showing activity in the sector remains in contraction.

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