The Bank of England has opted to maintain interest rates at their current 3.75% level, even as policymakers project a deteriorating labor market with unemployment expected to climb to 5.3% this year. The decision balances concerns about weakening economic conditions against the need to ensure inflation remains under control.
The committee’s voting pattern demonstrated significant internal disagreement, with a 5-4 split indicating that a substantial minority favored immediate easing. This close division suggests that the case for lower rates is strengthening and that future cuts are increasingly likely. The committee has already reduced rates six times since the middle of 2024, establishing a clear trajectory toward looser monetary policy.
Governor Andrew Bailey focused on the inflation outlook in explaining the decision to hold rates steady. He projected that inflation would fall back to approximately 2% by spring, which he characterized as encouraging progress. While acknowledging this positive development, Bailey emphasized that securing sustainable low inflation requires maintaining appropriate policy settings, though he suggested conditions should permit further rate cuts later in the year.
The labor market outlook has deteriorated notably, with the Bank now forecasting unemployment will reach 5.3% this year, higher than the 5% previously projected. This increase is partly attributed to the impact of higher employer costs from increased national insurance contributions and the rising minimum wage. While these factors have contributed to flat employment growth over the past year, they are also expected to moderate wage increases, which should help prevent inflation from becoming entrenched in the economy.
Chancellor Reeves’s budget measures continue to influence the inflation trajectory positively. Her package of anti-inflation policies, including utility bill reductions and rail fare freezes starting in April, are expected to have a significant dampening effect on consumer prices. As a result, the Bank forecasts inflation will decline to 2.1% by mid-2026, substantially lower than December’s 3.4% and close to the 2% target, offering hope for households struggling with elevated living costs.
Bank of England Keeps Rates at 3.75% While Unemployment Forecast Rises to 5.3%
