The Future of UK Interest Rates as the Bank of England maintains the interest rate at 3.75%
The Bank of England kept interest rates unchanged at 3.75% on 5 February. This decision followed a closely divided vote by the Monetary Policy Committee (MPC), with five votes in favour and four against. While a change was not widely expected after December’s reduction, the Bank’s latest comments suggest that further cuts are becoming more likely later this year.
Governor Andrew Bailey told the BBC that the current economic backdrop was “encouraging”, but said more evidence of sustained stability is needed before rates are lowered again. He also said that he expects “some further reduction” in the months ahead, although rates are unlikely to return to the ultra-low levels seen during the pandemic or the financial crisis.
A Mixed Economic Picture
The Bank expects inflation to return to its 2% target by the spring, supported by lower household energy bills and measures introduced in the Budget. Inflation stood at 3.4% in the year to December, but the Bank believes it will continue to fall.
However, the wider economic outlook has softened. The Bank has reduced its UK growth forecast for 2026 from 1.2% to 0.9% and now expects unemployment to rise slightly to 5.3%, up from its previous estimate of 5%.
These weaker forecasts strengthen the argument for cutting rates, as lower borrowing costs typically support economic growth and employment.
Divided Views Within the MPC
The four MPC members who voted for a rate cut in December repeated their call for a further quarter-point reduction. The four members who previously voted to hold rates maintained their position. Governor Andrew Bailey, however, changed his position, having supported a cut in December but voting to hold rates this time.
When Could Rates Fall?
Following the Bank’s latest report, expectations for a rate cut have shifted earlier. Capital Economics has suggested April as the most likely timing, without ruling out March. Financial markets, which had previously anticipated a June cut, have also moved expectations forward to April (BBC News).
Impact on Mortgages and Savings
For homebuyers and those looking to remortgage, the decision to hold rates may be disappointing, particularly as the housing market enters a busy period. However, the increasing likelihood of cuts later this year provides some reassurance that borrowing costs may ease.
Even though the timing of any rate cut is unknown (although predicted to be in Spring), this news has been welcomed by many buyers who have struggled to find affordable mortgage products. On the other hand, according to the BBC, this outlook among borrowers has led to more competition for properties.
Furthermore, savers aren’t positive about the outlook. The majority of savings providers have already reduced their rates since the start of the year. While lower inflation helps protect the real value of savings, further base rate cuts would likely reduce returns.
Business Reaction
Feedback gathered by the Bank suggests that many firms are hiring more cautiously or experiencing squeezed profits. Rising costs, including increases to the minimum wage and National Insurance contributions, have added pressure. The Bank also noted that recent rises in unemployment have been concentrated among younger workers.
On a more positive note, according to the BBC, businesses reported that food price inflation appears to have peaked. Commodity prices for items such as cocoa and cattle, which rose sharply last year, have since eased.
How can we help
Should you need a mortgage or other type of loan, let us know so that we can let you know about the mortgage brokers we work with. Alternatively, if you need support in understanding the impact of interest rates on your business, please speak with your Client Manager at ATN Partnership.