Bank of England Set to Keep Interest Rates Steady as Inflation Stays Above Target

Interest rates are widely expected to remain unchanged as the Bank of England’s Monetary Policy Committee (MPC) convenes for its first policy meeting of the year.

In December, the MPC voted to reduce the Bank rate from 4% to 3.75%, while indicating that borrowing costs were “likely to continue on a gradual downward path.” The Bank rate is the committee’s main instrument for steering inflation — which measures the yearly pace of rising prices — toward its 2% target. It also plays a crucial role in determining how much lenders charge for mortgages and loans, as well as the returns banks and building societies offer to savers.

Most analysts anticipate that the MPC will leave the Bank rate unchanged at 3.75% when it announces its latest decision at 12:00 GMT on Thursday. Inflation remains above the target, standing at 3.4% based on the most recent figures for the year to December.

The December rate cut was narrowly approved by the nine-member committee, which also struck a cautious tone about the economic outlook. Analysts say there has been little new data so far this year to materially shift the balance between stubbornly high inflation and sluggish economic growth.

There is also a widespread belief that the Bank will avoid giving firm guidance on the timing or scale of future cuts, as policymakers wait for clearer signals on how inflation is evolving.

Some economists are forecasting a single rate reduction during 2026, while others think the MPC could opt for two cuts over the course of the year.

How rates affect your finances

Roughly one in three households has a mortgage, and among those, about one million are on tracker or variable-rate deals that typically move in line with changes to the Bank rate.

Most mortgage holders, however, are on fixed-rate products. While their monthly payments are not immediately altered by changes in the Bank rate, future refinancing deals can be affected.

At the start of the year, fixed mortgage rates for people renewing or taking out new loans edged lower as lenders competed for business. But commentators note that broader cost pressures facing lenders appear to be rising, which could slow or prevent further reductions.

The December rate cut, along with subsequent market conditions, has also prompted savings providers to lower the interest they pay to customers.

Rachel Springall, from financial information service Moneyfacts, said: “The slaughter of savings rates will sadden hard-pressed savers. Since the start of this year, more than two-thirds (70%) of savings providers have cut their rates.

“As inflation remains well above target, real returns on cash savings are weak and this can lead to a dangerous attitude of apathy.”

The MPC holds eight meetings each year. Following its latest gathering, the Bank will also release its quarterly Monetary Policy Report, outlining the economic assessments and forecasts that underpin its interest rate decision.

By fLEXI tEAM