EuroWire, LONDON: The Bank of England kept its key interest rate unchanged at 3.75% on Thursday, opting for caution as inflation eases but remains above the central bank’s 2% target. The Monetary Policy Committee voted 5 to 4 to maintain Bank Rate, with four members favoring a quarter point cut to 3.5%, according to the bank’s policy statement and meeting minutes.
The decision follows a quarter point reduction in December, when the central bank lowered borrowing costs from 4.0% to 3.75%. Since then, policymakers have weighed signs that price pressures are cooling against evidence that domestic inflation, particularly in services, remains sticky. The bank reiterated that monetary policy is restrictive and will need to remain so for long enough to ensure inflation returns sustainably to target.
Official data show consumer price inflation was 3.4% in December 2025, up from 3.2% in November, after falling from 3.8% in September. The Bank of England has highlighted that goods inflation has eased significantly from earlier peaks, while services inflation and wage growth have been more persistent. Energy prices have been a major swing factor for households, and recent inflation readings have kept the cost of living in focus for consumers and businesses.
Labour market indicators point to cooling demand for workers. The unemployment rate stood at 5.1% in the three months to November 2025, while regular pay growth was 4.5% over the same period. Policymakers have pointed to a loosening jobs market as a potential sign that wage pressures will continue to moderate. Even so, Bank Rate remains well above levels that prevailed before the inflation surge, keeping financing conditions tight across the economy.
Close vote highlights policy tensions
The split decision underscored a widening debate on the committee over the pace of disinflation and how quickly borrowing costs should be reduced after a long period of restrictive policy. The minutes showed that members favoring a cut judged progress on inflation and pay growth sufficient to begin easing further, while those voting to hold preferred more evidence that inflation will stay on a durable path back to 2%. The central bank said decisions will remain guided by incoming data and its assessment of inflation persistence.
Alongside the rate announcement, the bank published its updated Monetary Policy Report, which set out the economic backdrop shaping the committee’s deliberations. The report highlighted the role of energy bills and regulated prices in near term inflation dynamics, including an expected decline in the household energy price cap to £1,616 in April from £1,758 previously. The bank’s projections also showed inflation easing further through 2026, with policymakers monitoring how quickly domestic cost pressures cool.
Households feel the impact of high rates
The hold at 3.75% means many households and businesses will continue to face elevated borrowing costs compared with the pre inflation period, particularly on variable rate loans and refinancing mortgages. Higher interest rates have also supported returns for savers, though real income effects depend on how quickly inflation falls. In its communications, the central bank has emphasized balancing progress on inflation with the need to avoid loosening financial conditions before price stability is secured.
The next policy decision is scheduled for March 19, and the next official inflation release is due on Feb. 18. The Bank of England said it will continue to assess a broad set of indicators, including inflation, wage growth and broader measures of economic activity, when setting Bank Rate. Thursday’s close vote left policy firmly restrictive, while signaling that the committee remains divided on when further easing would be consistent with returning inflation to target.