Bank of England Holds at 3.75% as Inflation Concerns Balance Against Growth Weakness

The Bank of England has maintained interest rates at 3.75%, navigating a delicate balance between ensuring inflation stays under control and supporting an economy showing signs of weakening. The decision reflects the complex trade-offs facing monetary policymakers.
The committee’s 5-4 vote demonstrated the challenging nature of these trade-offs. Four members believed that weakening economic growth and falling inflation already justified lower rates, while five felt that maintaining current settings was necessary to secure low inflation. This division follows six rate cuts since mid-2024 and suggests that the easing cycle will continue, though the pace remains contested.
Governor Andrew Bailey highlighted both sides of the equation in his remarks. He emphasized that inflation is expected to fall to around 2% by spring, representing significant progress toward price stability. However, he also stressed the importance of ensuring inflation remains at this level, which requires careful management of interest rates. This balancing act explains why the committee is proceeding cautiously despite economic weakness.
The economic growth forecast has been revised sharply lower, with GDP now expected to expand by just 0.9% this year compared to 1.2% previously anticipated. This weakness is partly attributed to higher employer costs from increased national insurance contributions and the rising minimum wage, which have contributed to flat employment growth. The unemployment rate is projected to climb to 5.3%, reflecting deteriorating labor market conditions.
Despite these growth concerns, Chancellor Rachel Reeves’s budget measures are providing support on the inflation front. Her package, including utility bill cuts and rail fare freezes from April, is expected to drive inflation down to 2.1% by mid-2026, compared to 3.4% in December. This dramatic improvement offers policymakers confidence that they can afford to cut rates further to support growth, though they remain cautious about the timing to ensure inflation doesn’t resurge.