The Bank of England held interest rates steady at 3.75% in a surprisingly tight 5-4 vote on 4 February – far closer than the 7-2 split most economists had predicted – highlighting growing internal divisions and boosting expectations for further cuts as soon as spring 2026.
In its February 2026 Monetary Policy Summary and Minutes, released on Thursday (5 February), the Monetary Policy Committee (MPC) revealed that five members – including Governor Andrew Bailey – voted to maintain Bank Rate at 3.75%, while four (Sarah Breeden, Swati Dhingra, Dave Ramsden, and Alan Taylor) pushed for an immediate 0.25 percentage point reduction to 3.5%.
This narrow margin underscores a pivotal shift: while caution around lingering inflation risks persists, the committee increasingly sees downside threats from weak demand and labour market slack outweighing persistence concerns.
Inflation set to plunge toward target – Thanks to energy and Budget effects
CPI inflation stood at 3.4% in December 2025 (down from 3.8% in September), still above the 2% target. However, the Bank’s latest projections point to a sharp fall to around 2% from April 2026 — earlier and more pronounced than anticipated in November.Key drivers include:
- Fading one-off impacts from energy and food prices
- Measures in Budget 2025 (announced by Chancellor Rachel Reeves) that ease household energy bills and delay fuel duty rises
- Softer import prices and global energy trends
Underlying pressures are easing too: pay growth and services inflation continue to moderate, with Agents’ surveys indicating 2026 pay settlements around 3.4% – close to levels consistent with the 2% target.
New Bank staff analysis in the February 2026 Monetary Policy Report finds limited evidence of structural changes in wage bargaining that could entrench higher inflation.
Economy showing clear signs of slack – raising downside risks
The decision reflects balanced but tilting risks. Inflation persistence has “continued to become less pronounced,” while risks from weaker demand are rising:
- Subdued GDP growth below potential
- Unemployment rising to just over 5%
- Wider projected output gap than in November
- Cautious households potentially keeping saving rates elevated
Since the easing cycle started in August 2024, the Bank has cut rates by 150 basis points, making policy less restrictive. The MPC emphasised setting rates to ensure inflation hits – and sustainably stays at – 2% in the medium term, balancing these evolving risks.
What this means for borrowers, savers and businesses
- Mortgages and loans – Variable and tracker rates remain unchanged for now, but the dovish tilt has already influenced market pricing. Fixed-rate deals could become more affordable if cuts materialize, especially with inflation data due soon.
- Savers – Returns on cash accounts face further pressure from any additional easing.
- Economy and businesses – Weaker demand and slack may curb investment, but anticipated further loosening supports a soft landing rather than a recession.
The next MPC meeting is on 19 March 2026, followed by 30 April 2026. Analysts suggest the close vote and dovish language increase the odds of a cut by spring – possibly as early as April – if upcoming inflation prints confirm the downward path without rebounding pressures.
Governor Bailey noted scope for “some further reduction in Bank Rate this year” if the outlook holds. For UK households and firms eyeing lower borrowing costs, today’s razor-thin decision turns “possible later in 2026” into “likely quite soon.”
Keep an eye on inflation figures – the path to cheaper money just got clearer.
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