The Bank of England has opted to keep its benchmark interest rate steady at 3.75% following a closely contested vote by its Monetary Policy Committee. In a significant development, the central bank has also downgraded its growth projections for the UK economy, signalling ongoing challenges ahead.
Monetary Policy Committee's Decision
The rate-setting committee reached its decision with a narrow majority of 5–4 in favour of maintaining the current Bank Rate. Notably, four members advocated for a reduction of 0.25 percentage points, which would have brought the rate down to 3.5%. This split vote highlights the delicate balancing act facing policymakers as they navigate economic uncertainties.
Revised Economic Growth Forecasts
In a move that underscores concerns about the UK's economic trajectory, the Bank has revised its growth outlook downwards. The forecast for 2026 has been trimmed from 1.2% to 0.9%, while the projection for 2027 has been adjusted from 1.6% to 1.5%. These revisions reflect a more cautious assessment of the country's economic prospects in the coming years.
Inflation Outlook and Future Policy Direction
The Bank indicated that while Consumer Prices Index (CPI) inflation currently exceeds the 2% target, it is anticipated to align with this target from April onwards. This expected decline is attributed primarily to developments in energy prices, including those influenced by Budget 2025 measures.
Officials noted that labour market conditions, pay growth, and services price inflation have continued to moderate. However, they cautioned that some risks persist, particularly from weaker demand and a loosening labour market. The Bank stated explicitly that "on the basis of the current evidence, Bank Rate is likely to be reduced further", though it emphasised that judgements regarding additional policy easing would become increasingly nuanced.
Governor Andrew Bailey's Perspective
Bank of England Governor Andrew Bailey expressed optimism about the inflation trajectory, stating: "I expect to see quite a sharp drop in inflation over coming months." He acknowledged increased confidence in wage disinflation trends while noting uncertainty about how anticipated drops in inflation might affect wage settlements. Bailey concluded that "the risks from inflation persistence appear to have continued to reduce", suggesting scope for further policy easing.
Context and Recent Economic Developments
The MPC's most recent rate cut occurred before Christmas, reducing borrowing costs from 4% to 3.75%. This marked the fourth reduction of the year, with Governor Bailey previously characterising further cuts as a "closer call" despite passing what he described as the recent peak in inflation.
Since that decision, official data revealed an unexpected uptick in inflation during December, with the CPI rate rising to 3.4% from 3.2% in November. This increase, the first in five months, was driven primarily by tobacco duties and airfares.
Construction Sector Update
Separate economic data indicates that Britain's construction sector may be showing tentative signs of recovery from what has been described as a "tailspin". The latest S&P Global UK construction purchasing managers' index (PMI) registered 46.4 for January, representing an improvement from December's five-and-a-half-year low of 40.1 and the best result since June of the previous year. However, this reading remains below the crucial 50 threshold, indicating that sector activity continues to contract, with housebuilding particularly under pressure.
The Bank of England's decisions and forecasts will be closely monitored by businesses, investors, and households across the UK as they navigate the evolving economic landscape.
