The Bank of England has maintained interest rates at 3.75%, with policymakers noting that moderating wage growth is helping to prevent high inflation from becoming entrenched in the economy. This development is seen as crucial for achieving sustainable low inflation.
The monetary policy committee’s 5-4 vote reflected diverse views on whether wage moderation has progressed sufficiently to justify immediate rate cuts. Four members believed conditions already warranted lower rates, while five preferred to wait. This division follows six rate cuts since mid-2024.
The Bank’s quarterly report highlighted how higher employer costs, including increased national insurance contributions and the rising minimum wage, have contributed to flat employment growth over the past year. While this employment weakness is concerning, policymakers expect it will help moderate wage increases, reducing the risk that strong wage growth would perpetuate high inflation.
Governor Andrew Bailey emphasized the positive inflation outlook, projecting it will fall to around 2% by spring. He suggested that the moderation in wage pressures, combined with government policy measures, creates conditions for further rate cuts. However, some committee members remain concerned about wage-driven inflation risks.
Megan Greene, a more hawkish committee member, expressed particular concern about strong wage growth and high consumer inflation expectations. She warned that cutting rates too quickly could constitute a “policy error” if wage pressures resurge. Despite these concerns, the Bank forecasts inflation will fall to 2.1% by mid-2026, compared to 3.4% in December, driven by Chancellor Rachel Reeves’s budget measures including utility bill cuts and rail fare freezes. GDP growth is expected to be just 0.9% this year, with unemployment reaching 5.3%.
