Interest rates stick at 3.75% in tight vote

Sara White, Editor, Business & Accountancy Daily. Croner-i

Bank of England leaves interest rate unchanged at 3.75% in close vote at the MPC despite their expectations inflation will fall from April.

Members of the Bank monetary policy committee (MPC) voted by a majority of 5–4 to maintain bank rate at 3.75%. Four members voted to reduce the rate by a quarter of a per cent to 3.5%, but lost the argument.

However, a window was left open for a possible rate cut in the next few months with the Bank of England meeting notes stating: ‘Although above the 2% target currently, CPI inflation is expected to fall back to around the target from April, owing to developments in energy prices including from Budget 2025.’

Inflation concerns shaped the decision to keep interest rate at 3.75%, with the Bank of England stating: ‘The extent of further easing in monetary policy will depend on the evolution of the outlook for inflation. The restrictiveness of policy has fallen as bank rate has been reduced by 150 basis points since August 2024. On the basis of the current evidence, bank rate is likely to continue on a gradual downward path. But judgements around further policy easing will become a closer call.’

But with April being a month of significant rises in bills from council tax to utilities and phone and broadband bills, achieving a return to 2% inflation seems a stiff call from the current 3.4%, one of the highest rates among major OECD countries. The Budget cut to energy was also limited to a small element of payers, those in most need of financial support and was an extension of existing policy, not a new measure per se, and a change to levies for electricity and gas companies, which will take time to filter through to consumers.

The one government policy which will feed through to inflation more quickly will be the freeze on rail fares for a year from April, rather than the usual inflation plus hikes commuters are normally landed with every year.

However, weak growth and rising unemployment are likely to keep the Bank alert to potential cuts, rather than sticking to frozen rates for a long time this year.

Susannah Streeter, chief investment strategist at Wealth Club, said: ‘The Bank of England has pushed a big red pause button on interest rate cuts as caution remains the name of the game and policymakers assess flickering growth and stubborn inflation. 

‘Although the signs are that the price spiral will be dampened down in the coming months, they’ve judged that it’s still too early to move. Still, it was a closer call than expected, and it puts a cut in March still very much in the picture.’

The consensus from economists is there are likely be two rate cuts this year.

‘Rate cuts remain on the cards in 2026 despite the decision,’ said Yael Selfin, chief economist at KPMG, warning that the MPC committee was ‘deeply split’ on the decision.

‘The minutes underscore the wide range of views on the MPC, with the committee remaining deeply split,’ she said. ‘New data over the coming months should support the case for a gradual easing of rates. The labour market for example, is expected to continue to soften which will help moderate underlying price pressures. We expect the Bank to cut interest rates twice in 2026, taking the bank rate down to 3.25%.’

Laith Khalaf, head of investment analysis at AJ Bell, warned: ‘It looks like a rate cut is now a question of when, not if. But any excitement over looser monetary policy needs to be tempered by the fact that in the longer term this doesn’t look like being the start of a flurry of rate cuts.

‘The Bank is fine tuning interest rate policy so that inflation lands somewhere near to 2% and stays there, rather than seeking to inject large amounts of stimulus into the economy.

‘This outlook may be blown off course by economic or geopolitical developments. For the moment the Bank remains in cautious mode, but it feels like we are closer to the button being pushed than had been expected. However, if and when the next rate cut materialises, there could then be a lot more wait and see to follow.’

There has been a gradual easing of interest rates since 2024, which gives some relief for households, businesses and the government.

MHA economic adviser Joe Ellis said: ‘For businesses, the decision offers welcome stability.

‘The message from the MPC is clear - a gradual policy of monetary loosening is underway, but they won’t risk rocking the boat in the process.’

The next interest rate meeting will be held on 19 March.