The Bank of England has held interest rates at 3.75%, with policymakers noting that the rising minimum wage, while contributing to employment stagnation, is helping to moderate broader wage growth. This wage moderation is seen as crucial for preventing inflation from becoming entrenched in the economy.
The committee’s decision featured a closer-than-expected 5-4 voting split, with four members supporting an immediate rate cut. This narrow margin indicates growing consensus toward further easing, following six rate cuts already implemented since the middle of 2024. The division suggests that while a pause was deemed appropriate now, additional reductions are likely in the near future.
Governor Andrew Bailey highlighted the improving inflation picture in explaining the hold decision. He projected that inflation would return to approximately 2% by spring, marking a significant achievement in the fight against price pressures. Bailey suggested that while current rates are justified to ensure inflation stays low, there should be scope for further cuts later in the year if conditions continue to improve.
The Bank’s latest monetary policy report examined the impact of higher employer costs on the labor market. The rising minimum wage, combined with increased national insurance contributions, has contributed to flat employment over the past year. However, policymakers view the resulting wage moderation as beneficial for inflation control, reducing the risk that strong wage growth would perpetuate high inflation.
Economic forecasts show GDP growth of just 0.9% this year, down from 1.2% previously expected, while unemployment is projected to climb to 5.3%. Meanwhile, Chancellor Rachel Reeves’s budget measures, including utility bill cuts and rail fare freezes from April, are expected to drive inflation down significantly. The Bank now forecasts inflation will fall to 2.1% by the second quarter of 2026, compared to 3.4% in December, offering hope that cost-of-living pressures are finally easing.