The Bank of England is poised to hold rates as inflation lowers expectations

The Bank of England is expected to keep interest rates on hold this week after rising inflation for the first time in five months, although markets believe the door remains open to a cut later in the spring.

Analysts expect the Bank’s Monetary Policy Committee (MPC) to vote to keep the key rate at 3.75% when it announces its decision on Thursday. The rate is already at a three-year low following four quarters of cuts last year, which lowered borrowing costs from 5.25 percent from July 2024.

The suspension follows data showing inflation rose to 3.4 percent in December, well above the Bank’s two percent target. Although policymakers have indicated that rates are on a downward trend, recent inflation readings have reinforced the case for near-term caution.

Markets are still pricing in two rate cuts this year, with the first likely to come as early as March. Economists view the February meeting as a short break rather than the end of the easing cycle.

The nine-member MPC has been divided in recent meetings, showing differing views on whether inflation will ease quickly or remain stubbornly high. In December, the committee voted 5-4 in favor of the cuts, with Governor Andrew Bailey casting the deciding vote.

Analysts at UBS said they expect Bailey to play a role in this. “After voting to cut rates in December, it is likely that Governor Bailey will vote to freeze rates,” the bank said.

Meanwhile, economists at Morgan Stanley said labor market data could be decisive for the next step. “We can expect Bailey to focus more on incoming jobs data, where we see an increase in unemployment. This could lead to a reduction in March,” they said.

EY Item Club also expects no change this week, describing a hold of 3.75 percent as “near certainty”. The forecaster said the MPC may indicate that while further cuts are possible, the rate-cutting cycle may be nearing its end.

The central bank will publish revised economic forecasts in line with Thursday’s decision, setting out its expectations for growth, inflation and unemployment. Bailey is also likely to face questions about recent volatility in global financial markets, driven in part by volatile tax announcements and political tensions related to Donald Trump.

In December, Bailey said he expected inflation to return to, or close to, the 2% target in April. Price growth is expected to ease as household debt falls following measures announced by Rachel Reeves, including the removal of some green taxes and a freeze on rail fares.

For now, economists believe that the Central Bank will choose patience, weighing the first signs of a cooling of inflation against continued price pressures and uncertainty in the global economy.