Insights
Market Insights
Bank of England Keeps Rates On Hold in Close 5-4 Decision
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Liquidity Watch
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February 05, 2026
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Bank of England Keeps Rates On Hold in Close 5-4 Decision
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February 05, 2026
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Bank of England Keeps Rates On Hold in Close 5-4 Decision
Bank of England Keeps Rates On Hold in Close 5-4 Decision |
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The Bank of England (BoE) held the Bank Rate at 3.75% today after a narrow 5–4 vote, with four members preferring a 25bps cut to 3.50%. This outcome was more dovish than the market had anticipated, with most expecting a 7-2 vote for a hold. Governor Bailey again cast the deciding vote, opting to hold but signalling a softening stance as inflation pressures continue to ease.
Recent data point to a cooling environment: inflation remains above target at 3.4% but is expected to fall back to around 2% starting from April, helped by energy-related effects. Wage growth and services inflation continue to moderate, consistent with a loosening labour market and subdued demand. Growth has weakened further, and unemployment is forecast to rise above its current 5.1% reading, reinforcing the view that labour market slack is building and reducing the risk of persistent inflation.
The BoE’s updated projections show inflation returning to target in Q2 2026 and remaining at or below 2% for much of 2027. Pay growth is expected to settle around levels consistent with the target, while productivity assumptions remain broadly unchanged. Although the neutral rate remains uncertain, policymakers noted that the stance of policy is becoming less restrictive and that further reductions in the Bank Rate are likely, though each step will be more finely balanced as the BoE approaches a more neutral setting.
Governor Bailey’s hold vote reflected a desire to consolidate disinflation progress while assessing underlying cost dynamics. Members voting to cut emphasised clearer labour market slack and ongoing disinflation in wages. Those members voting to hold pointed to lingering domestic price pressures and the need for greater evidence before easing. Today’s close vote signals that the Monetary Policy Committee (MPC) is moving closer to cutting but will remain guided by incoming data.
Forward guidance highlights the importance of wage dynamics, services inflation, fiscal policy, and global risks. The U.K. Autumn Budget’s regulated price changes will mechanically push inflation lower in Q2 2026, while geopolitical developments—particularly around energy—remain important to the medium-term outlook. The MPC continues to maintain a cautious easing bias rather than a fixed path.
Market pricing for additional rate cuts changed meaningfully following this dovish vote split: the market is now assigning a 60% probability of a 0.25% cut during the MPC’s March meeting. Rate path expectations imply one or two 0.25% cuts over the next 12 months, with the Bank Rate projected to trough near 3.25%. The BoE reiterated that the pace of adjustments will remain gradual, and dependent on sustained disinflation.
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