Bank of England holds rates at 3.75% as inflation nears 2% target

The Bank of England held Bank Rate at 3.75% on Thursday, keeping borrowing costs steady even as inflation remained above its 2% target and policymakers saw economic growth showing signs of improving, according to the central bank’s decision and accompanying forecasts. The Monetary Policy Committee vote split more narrowly than expected, with five members backing no change and four supporting a quarter-point reduction.

The decision came after the Bank of England had cut its key rate more frequently in recent months, having last lowered Bank Rate in December and having indicated further reductions were possible. In its updated outlook, the Bank said inflation was on track to return to the 2% target sooner than previously forecast.

Bank of England Governor Andrew Bailey said the central bank now expected inflation to fall back to “around 2% by the spring,” adding that the Bank had held rates unchanged at 3.75% because policymakers want inflation to stay at that level. He said that if inflation continues to hold, there should be “scope for some further reduction in Bank Rate this year.” The bank attributed much of the faster drop in inflation to measures announced in November’s annual budget, including steps aimed at reducing the cost of living, particularly energy bills.

While the Bank painted a quicker path for inflation toward target, it trimmed its growth projections for the British economy. The forecast for growth this year fell from 1.2% to 0.9%, and the outlook for 2027 was reduced from 1.6% to 1.5%, according to the decision’s forecasts.

The central bank also expected labor-market conditions to weaken. It projected the unemployment rate would rise to 5.3% this year, after it had previously said in November that unemployment would peak at 5.1%.

Economists said the outcome still left room for additional rate cuts later in 2026. Following the vote split and the central bank’s forecast package, economists cited expectations for at least two more quarter-point cuts this year, with one analyst saying a cut at the next meeting in March was “most certainly on the table,” and another suggesting rates could eventually fall to 3% later this year.

That interest-rate trajectory matters for both consumer spending and business investment because lower rates reduce borrowing costs, though the Bank also signaled the balance policymakers must maintain if easing monetary conditions risk stoking renewed price pressures.