The Bank of England has held interest rates at 3.75%, with policymakers highlighting how government cost-of-living measures will drive substantial reductions in inflation. These policy interventions are reshaping the outlook for both prices and interest rates.
The monetary policy committee’s 5-4 vote reflected ongoing debate about timing, with four members supporting immediate easing while five preferred to wait. This division follows six rate cuts since mid-2024 and suggests that additional reductions remain likely as cost-of-living measures take effect.
Governor Andrew Bailey emphasized that inflation is expected to fall to around 2% by spring, representing a return to the target level. He attributed this improvement partly to government measures designed to ease household budget pressures. While maintaining rates now, Bailey indicated that conditions should allow for further cuts later in the year.
Chancellor Rachel Reeves’s package of cost-of-living measures is central to the improved inflation forecast. Her budget includes cuts to utility bills and a freeze on rail fares, both taking effect in April. These policies are expected to have a direct and immediate impact on household expenses, reducing inflationary pressures across the economy.
The Bank now forecasts inflation will decline to 2.1% by the second quarter of 2026, compared to 3.4% in December. This dramatic improvement is largely attributable to the government’s anti-inflation measures. Economic growth forecasts show GDP expanding by just 0.9% this year, down from 1.2% previously, while unemployment is expected to reach 5.3%. The combination of falling inflation and weak growth supports the case for future rate cuts to support the economy.
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