Bank of England set to keep interest rates on hold as it faces ‘balancing act’

The Bank of England is expected to hold interest rates at 3.75% as policymakers face a “balancing act” of controlling inflation and supporting economic growth.

Most economists think the Bank’s Monetary Policy Committee (MPC) will opt to leave rates unchanged at its next decision on Thursday.

The MPC delivered a cut to borrowing costs before Christmas, from 4% to 3.75%, marking the fourth reduction of the year.

Governor Andrew Bailey said at the time that the UK had “passed the recent peak in inflation and it has continued to fall”, but he cautioned that further cuts will be a “closer call”.

Since that decision, official data has shown that inflation bounced back in December, rising for the first time in five months.

The rate of Consumer Prices Index (CPI) inflation came in at 3.4% for the month, up from 3.2% in November, with tobacco duties and airfares among the factors driving prices higher.

Economists think this inflation reading will encourage policymakers to keep rates on hold this month.

Laith Khalaf, head of investment analysis for AJ Bell, said: “It’s extremely unlikely the Bank of England is going to do anything but hold interest rates where they are at its February meeting.

“The Bank reduced rates in December and has clearly indicated it wants to adjust policy gradually, so consecutive cuts are pretty much unthinkable in the current economic environment.”

He said that the Bank of England will look through one-off factors pushing up prices in December but that there were “lingering inflation fears” within the committee.

Economists pointed to other datasets that the MPC will be keeping a close eye on, including gross domestic product (GDP) which returned to growth in November at 0.3%.

Wage growth has also continued to slow while unemployment remained at its highest level for nearly five years, the latest official data showed.

Evidence that the labour market is cooling is likely to be encouraging news for policymakers because it indicates that some pressures on inflation are reducing, but they will also be cautious of it weakening economic growth.

Edward Allenby, senior economic adviser at Oxford Economics, said: “The MPC will continue to face a delicate balancing act between supporting growth and preventing inflation from becoming entrenched, with forthcoming data on pay settlements likely to play a decisive role in shaping the next policy move.”

Mr Allenby is forecasting the next rate cut to come in April.

Matt Swannell, chief economic advisor to the EY Item Club, said it was a “near certainty” that rates will be kept unchanged, adding: “Some of the MPC doves that favoured a cut in December still harbour some concerns around sticky wage growth and inflation.”

He also agreed that April was the “most likely time for the next rate cut”.

“By then, the MPC will have a clearer view of the 2026 pay awards and whether there is further evidence of slack emerging in the economy,” he said.