Bank of England Holds Rates at 3.75%, Split Vote Signals Cuts Ahead

The Bank of England kept interest rates unchanged at its first policy meeting of the year on Thursday, opting for caution as inflation remains well above target despite growing signs of weakness in the U.K. labor market.

The central bank maintained its benchmark Bank Rate at 3.75%, in line with market expectations. Policymakers pointed to persistent inflationary pressures as the main reason for holding steady, even as hiring conditions soften and wage growth slows.

However, the vote split on the nine-member Monetary Policy Committee (MPC) was narrower than anticipated. Five members voted to keep rates unchanged, while four supported an immediate cut. The close division highlights increasing momentum within the committee toward easing policy in the coming months.

The BoE cut rates by 25 basis points in December and signaled at the time that borrowing costs were “likely to continue on a gradual downward path.” That decision was also finely balanced, underscoring how delicately policymakers are weighing the risks of easing too soon against the danger of keeping policy too restrictive for too long.

Analysts at ING noted that labor market conditions continue to deteriorate and pay growth is slowing rapidly. But with headline inflation still elevated — running at 3.4% in December, well above the 2% target and memories of the 2022 inflation shock still fresh, the MPC has chosen to err on the side of caution.

Looking ahead, UBS expects the Bank of England to deliver two rate cuts this year, likely in March and June. The Swiss bank added that risks are skewed toward more easing, and forecasts that updated BoE projections will show inflation returning to the 2% target by the end of 2026.

Overall, while rates remain on hold for now, the increasingly divided vote suggests the debate inside the BoE is shifting, and that the next move in policy is more likely to be down than up.