The Bank of England, as expected, "stands pat," however, a 5:4 vote split ignites further speculation of a rate cut.

The Bank of England narrowly decided not to cut interest rates in its monetary policy vote, predicting that inflation will soon fall below its target anchor; this decision, which was closer to what economists widely expected, rekindled hopes in the market that the Bank of England will take action to cut interest rates next month. Bank of England Governor Andrew Bailey once again became the key swing vote, deciding in a 5-4 vote to maintain the interest rates at 3.75%, choosing to hold steady after cutting rates at its last meeting in December. Bailey himself stated in a statement, "There is still room for further cuts in the benchmark interest rate this year." In the updated economic forecast summary, the Bank of England predicts that overall inflation will reach its long-term target range of 2% in April, and warns of slowing economic growth and rising unemployment. It is understood that the decision of the Bank of England Monetary Policy Committee (MPC) was significantly more dovish than economists widely expected; market pricing before the meeting did not reflect this level of closeness, with almost unanimous consensus that the probability of a rate cut was close to zero, and the vote was overwhelmingly in favor of keeping the rates unchanged. Earlier on Thursday, as speculation about the political prospects of Prime Minister Keir Starmer heated up, the pound fell and long-term UK government bond yields rose sharply. After the interest rate decision, which was much more dovish than expected, was made public, the downward trend of the pound expanded, falling by as much as 0.8% to $1.3550; traders continued to increase their bets on further interest rate cuts by the Bank of England, with the probability of a 25 basis point rate cut in March being priced at over 50%, and interest rate futures traders generally expecting a cumulative cut of 45 basis points by the end of the year. "The close vote to maintain interest rates by the Bank suggests that the question is not 'if' they will cut rates, but 'when'," said Schroders global economist George Brown. "The temporary downward inflation window ahead should provide strong enough cover to justify another one or two benchmark rate cuts." The Bank of England's forecast summary shows that inflation will return to the 2% target in April, but will fall below the target for much of 2027. The MPC meeting minutes stated that there was "evidence of weak economic activity and an increase in unused labor in the labor market." The minutes also added that the upside risks to inflation "have become less apparent." Bailey and Catherine Mann, one of the five members who voted to keep rates unchanged this month and an external MPC member, both hinted that they are close to shifting to the camp supporting rate cuts. The minutes stated that they "attached more weight to the downward risks to inflation coming from weakened economic activity." The Bank of England has long been trying to strike a balance between stubborn inflation and signs of weakening job market conditions. Inflation in the UK is more difficult to tame compared to most other major developed economies, but the domestic job market in the UK is showing signs of weakness. However, recent data shows that UK businesses are reducing recruitment and layoffs are rising. Inflation is still significantly above the Bank of England's target, currently at around 3.4%, but the Bank of England's forecasts suggest that pressure will continue to ease. According to the latest forecast, inflation will not rise above 2% from April to early 2029 and is expected to be well below the target for four quarters. The overall forecast is based on a rate path: interest rates will fall to a low of 3.25% by the end of this year, then rise back to around 3.75% by 2029. Four dovish MPC members - Swati Dhingra, Alan Taylor, Dave Ramsden, and Sarah Breeden - all voted in favor of a rate cut, a result that was contrary to the widely expected outcome among most economists; they had originally thought only two to three members would push for further easing. The November budget of the Labour government abolished social and climate levy charges in household energy bills and significantly reduced other regulated prices; the Bank of England stated that this would mechanically reduce inflation by 0.5 percentage points in the second quarter. Along with this decision, the Bank of England also released its latest economic forecasts. The growth forecast for this year has been drastically revised down to 0.9% (previously 1.2%), the forecast for 2027 growth has been revised down to 1.5% (previously 1.6%). The forecast for economic growth in 2028 is 1.9%, slightly higher than the previous forecast of 1.8%. Weaker growth is accompanied by worse unemployment prospects. The unemployment rate is currently expected to peak at 5.3% in the second quarter of this year, higher than the latest official data from the UK Office for National Statistics showing 5.1%. Throughout 2026, the unemployment rate is roughly 0.3 percentage points higher than the Bank of England's previous expectations - meaning an additional 100,000 people may be out of work. The Bank of England expects that weakening wage bargaining power will help keep this year's annual wage growth at just 3.25%, a level the Bank says is consistent with 2% inflation. The Bank is more optimistic about productivity but has not changed its expectations for potential long-term economic output growth of around 1.4%. Earlier this week, the Reserve Bank of Australia turned towards a tightening cycle after a brief period of loosening last year and chose to raise interest rates due to concerns about an overheated labor market, highlighting the delicate task facing global policymakers.