5 February 2026
If you are covering the Bank of England’s decision to hold interest rates, please see the following comment from Lindsay James, investment strategist at Quilter:
“In its first interest rate decision of the year, the Bank of England has held rates at 3.75%, with five members of the monetary policy committee voting for a hold while four voted for a 0.25% cut. This is a much closer split than had been expected, and the Bank’s stance has shifted somewhat, clearly outlining that it expects rates to be cut further based on the current evidence.
“Inflation rose to 3.4% in December, marking the first increase for several months. Some of this was driven by timing effects, such as higher air fares over the Christmas period, but services inflation also ticked up. Even so, the broader trajectory is still encouraging, and the Bank now expects inflation to fall back to around the target from April, reaching 2.1% in 2026 Q2 which is 0.7% lower than had been anticipated in the November report.
“Markets had not been fully pricing in the first rate cut until June, but this has shifted to April following today’s report. For this to materialise, the MPC will want to see further evidence of falling inflation, which should be more apparent from the second quarter onwards as the impact of factors such as the freeze in rail fares and the removal of green levies from energy bills will start to be felt.
“Crucially, the Bank will also want to see evidence of cooling wage growth. Recent payrolls data has shown persistent weakness in the labour market, and this could bring pay settlements, and subsequently inflation, down faster than the Bank currently assumes.
“The economy beat expectations in the latest GDP print, but the uptick was a meagre 0.3% rise in November compared with expectations of 0.1%. The Bank’s latest forecasts suggest GDP growth will come in at just 0.9% in 2026, before rising to 1.5% in 2027 and 1.9% in 2028 – down from 1.2%, 1.6% and 1.8% respectively in the previous forecast. Economic growth has been lacklustre for some time now, and if the UK were to fare even worse than expected and slip into recession, the Bank would face mounting pressure to deliver deeper and more frequent cuts.
“Markets are now likely to price in more than the one to two rate cuts expected ahead of this announcement, with earlier assumptions that rates will be nearing their trough by year end potentially called into question. But as ever, much will depend on any surprises in the data.”
