Bank Of England Holds Rates As Inflation Drops

The Bank of England held its main interest rate steady at 3.75% on Thursday, February 5, 2026, signaling a cautious but optimistic outlook for the United Kingdom’s economic future. The decision, announced alongside the Bank’s quarterly Monetary Policy Report, comes at a time of shifting economic winds: inflation is gradually receding, growth forecasts have been trimmed, and the labor market is bracing for a modest uptick in unemployment. With the European Central Bank also opting to keep its rate unchanged the same day, financial markets were hardly surprised. Yet, beneath the surface, the details reveal a central bank balancing hope, uncertainty, and growing pressure from all sides.

The Monetary Policy Committee’s (MPC) vote was far closer than many analysts anticipated. Five of the nine members favored holding rates, while four advocated for a 0.25% cut—a split that underscores the ongoing debate over how aggressively to loosen monetary policy. As reported by The Independent, this narrow margin is a signal that further rate cuts could be on the horizon, perhaps as soon as the next scheduled review on March 19.

Governor Andrew Bailey, addressing the press after the decision, struck a cautiously upbeat tone. “We now think that inflation will fall back to around 2% by the spring. That’s good news,” Bailey said, according to The Independent. “We need to make sure that inflation stays there, so we’ve held rates unchanged at 3.75% today. All going well, there should be scope for some further reduction in Bank Rate this year.”

Inflation, which had unexpectedly ticked up to 3.4% last month, is still running above the Bank’s 2% target. However, the Monetary Policy Report forecasts a swifter return to target than previously thought—about a year ahead of earlier projections. This faster-than-expected drop is partly credited to measures announced in November’s annual budget by Treasury chief Rachel Reeves, particularly those aimed at reducing energy costs for households. Grocery inflation, a pain point for many UK consumers, has also eased slightly in recent weeks, providing a modest reprieve at the checkout.

Despite the rosier inflation picture, the Bank has trimmed its expectations for economic growth. The 2026 GDP growth forecast has been revised downward from 1.2% to 0.9%, and the 2027 forecast from 1.6% to 1.5%. The Bank’s Monetary Policy Report, as cited by BBC, also projects that unemployment will rise more than previously predicted—now expected to reach 5.3% by mid-2026, up from an initial forecast of 5% and a previous peak forecast of 5.1%. This anticipated rise in joblessness tempers optimism about the broader recovery and highlights the delicate balancing act facing policymakers.

For homeowners and savers, the MPC’s decision carries direct consequences. As The Independent noted, the best fixed mortgage rates remain around 3.5%, and the Bank’s move should reinforce a period of pricing stability. Still, the overall pace of market recovery is expected to be “slow and steady,” with a high number of homes for sale likely to keep property prices in check. Meanwhile, several mortgage providers have increased rates in recent days, and savings account rates are generally falling—except for a rare few cash ISAs bucking the trend.

The pound responded to Thursday’s announcement by slipping against both the US dollar and the euro, falling 0.6% and 0.5% respectively. This decline was attributed not only to the Bank’s rate decision and downgraded growth outlook but also to heightened political turbulence and questions over Prime Minister Sir Keir Starmer’s leadership.

With the next MPC meeting set for March 19, speculation is mounting about when the Bank will resume its rate-cutting cycle. Luke Bartholomew, deputy chief economist at Aberdeen, told The Independent, “A cut at the next meeting in March is most certainly on the table. And even if it takes a bit longer for the next cut to come through, we still think there is a strong case for rates to eventually fall to 3% later this year.” The Bank reviews interest rates eight times a year, typically every six weeks, with further meetings scheduled for April 30, June 18, July 30, September 17, November 5, and December 17.

Governor Bailey remains circumspect, emphasizing the need for “sustainable” progress on inflation before easing further. He explained, “We need to see this pattern emerge and more evidence, in my view, that we will have a sustainable return to target and that is more of an issue of underlying inflation. Just as last year, we had what we tended to call the hump. We have to be very focused on the underlying story.”

Not everyone is satisfied with the Bank’s measured approach. The Trades Union Congress (TUC), representing millions of working people across the UK, issued a sharp rebuke. General Secretary Paul Nowak argued, “Working people in every corner of the country are still being hammered by the living standards crisis. The Bank of England has a crucial role to play in easing pressures for mortgage payers, and boosting confidence across the economy so the UK can get back to stronger and sustainable growth. The Bank was too cautious last year. They should go further and faster with a rapid-fire sequence of rate cuts in the months to come.”

Political ramifications are never far from economic decisions. Britain’s Labour government, which swept to power in 2024 but has since seen its support erode amid economic headwinds, is banking on a sharp fall in inflation to revive its fortunes. Lower inflation would pave the way for further rate cuts, easing borrowing costs for households and businesses, and—so the government hopes—restoring some of the public’s lost confidence.

It’s not just the Bank of England grappling with these choices. The European Central Bank, which also held rates steady on Thursday, faces its own set of challenges. Yet, as Dow Jones reported, the outlooks for inflation and growth are diverging across the Channel, suggesting that the two institutions may chart different courses as the year unfolds. The Bank of England’s signal that further easing is possible in 2026 keeps markets guessing about the precise timing and scale of future moves.

For now, the Bank’s message is one of cautious optimism, tempered by a recognition of the challenges that remain. Inflation is coming down, but not yet vanquished. Growth is still positive, but weaker than hoped. Unemployment is set to rise, but not dramatically. And while rate cuts are likely, the pace and magnitude will depend on an evolving mix of economic data, political pressures, and global events.

As the UK heads into the spring, all eyes will be on the MPC’s next move—and on whether the Bank’s balancing act can deliver the stability, growth, and relief that so many Britons are hoping for.