Bank of England holds interest rates at 3.75%

The Bank of England has kept UK interest rates on hold at 3.75%, following a closely split vote among policymakers as inflation shows signs of easing and the economy continues to cool.

The decision, taken by the Monetary Policy Committee (MPC) at its meeting ending on 4 February, was widely expected by economists. However, the 5–4 vote in favour of holding rates – with four members backing an immediate cut to 3.5% – was narrower than markets had anticipated, underlining growing divisions within the Bank over how quickly to ease policy.

“We now think that inflation will fall back to around 2% by the spring. That’s good news,” Bailey said. “We need to make sure that inflation stays there, so we’ve held interest rates unchanged at 3.75% today. All going well, there should be scope for some further reduction in Bank Rate this year.”

Inflation remains above the 2% target for now, but the Bank said falling energy prices – partly reflecting measures announced in Chancellor Rachel Reeves’ Budget last November – are expected to bring headline inflation down from April. The MPC also noted signs that pay growth and services inflation are easing, as weaker economic growth and a loosening labour market reduce pressure on prices.

Despite this improving inflation outlook, the Bank downgraded its forecasts for economic growth and said unemployment is likely to rise. It now expects the UK economy to grow by 0.9% in 2026, down from a previous forecast of 1.2%, with slightly weaker growth also projected for 2027.

The central bank has cut interest rates six times over the past 18 months after rates peaked at 5.25% in 2024. The most recent cut came in December, when rates were lowered from 4% to 3.75% amid concerns over rising unemployment and sluggish growth.

While policymakers signalled that further cuts are likely, they cautioned that decisions will depend on whether the expected drop in inflation proves durable rather than temporary.

“The risk from greater inflation persistence has continued to become less pronounced,” the Bank said in its Monetary Policy Summary, “while some risks from weaker demand and a loosening labour market remain.”

The unexpectedly tight vote may fuel expectations in financial markets that the Bank could move sooner rather than later. Investors have increasingly priced in another rate cut later this year, although Bailey stressed there was no set timetable for the next move.

Business groups said the decision offered cautious relief to firms under pressure from high borrowing costs.

“While there are clear signs of cooling in the labour market, today’s decision underlines that bringing inflation sustainably back to target remains the Committee’s overriding priority.

“For SMEs, this means continued pressure on costs and cashflow at the start of 2026. However, the direction of travel for interest rates still appears to be downwards, provided inflation continues to ease. As conditions gradually improve, businesses will be better placed to make considered investment decisions, and access to funding that reflects their individual circumstances will remain an important part of navigating what is still a complex economic environment.”

“This rate hold provides some crucial breathing room, helping businesses capitalise on the positive shoots of economic growth we’ve seen in recent weeks,” he said. “Further anticipated rate cuts and cheaper borrowing costs will also help to offset the cost pressures SMEs have been forced to absorb – empowering firms to invest in productivity, rather than simply staying afloat.

“However, with over half of SMEs doubting their loan approval chances, the industry must now help to change SMEs’ perspective on finance. Banks, lenders and brokers must collaborate to ensure businesses know funding is not only accessible to them but guide them on how it can be used effectively to unlock their full potential.”

The Bank’s next interest rate decision is due on 19 March 2026.