MNI BOE WATCH: Holds Rate, Inflation Seen At Target Shortly

The Bank of England left Bank Rate on hold at 3.75% on a five-to-four vote by its Monetary Policy Committee, and delivered what BOE Governor Andrew Bailey called the "good news" that inflation was forecast to carry on falling before reaching a level close to 2.0% in April, hitting target a year earlier than the Bank had previously expected.

The narrow vote, the sharp lowering of the BOE's near-term inflation forecast, and a softening in pay expectations for 2026 in its Agents’ Pay Survey along with the policy guidance all paved the way for further easing ahead.

"On the basis of the current evidence, Bank Rate is likely to be reduced further," the MPC stated in the Policy Summary, though, in a sign that the rate-cutting cycle may be drawing to a close, it warned that "judgements around further policy easing will become a closer call."

A reference in the previous guidance to gradual easing was dropped in February’s summary. With 3% the mid-point of the BOE's neutral rate range and the market curve putting 3.25% as the trough, the MPC is likely to have to get off the policy-down escalator relatively soon.

Bailey told reporters the market curve "is in a fairly reasonable place" at present and that inflation could settle below 2% unless monetary policy is eased further, adding that the fact inflation is expected to come back to target is "obviously significant."

PAY SURVEY

The Agents’ 2026 pay survey, published alongside the policy decision, found that the average expected pay settlement was 3.4%, down from an average 4.0% for 2025. The BOE said that wage growth at around 3.25% would be consistent with its inflation target, with risks to either side.

In a speech last month, MPC member Megan Greene, who has been among the most hawkish members, called a previous survey’s results of year-ahead wage growth expectations of 3.7% for 2026 "not target consistent.” (See MNI INTERVIEW: Labour Market Weakness May Tame UK Inflation )

"Lower inflation in coming months should feed through into lower inflation expectations among households and businesses, reducing the risk that high inflation becomes self-fulfilling," the Monetary Policy Report stated.

MPC SPLIT

The summaries of individual views of the nine MPC members showed that among the no-change camp Greene stuck to her line that she places "more weight on the risk of inflation persistence" and that she wanted to see further evidence that inflation would settle sustainably at target, while Deputy Governor Clare Lombardelli said that it was not certain that wage growth would return to target-consistent rates and she remained concerned about upside and downside inflation risks.

The key swing voter has been Bailey, and he said he took the view that inflation risks had become more balanced, that he was "more confident in the overall path of wage disinflation" and that it appeared that the risks of inflation persistence had reduced.

Alan Taylor and Swati Dhingra were firmly established in the pro-cut camp before the meeting and duly delivered, with Dhingra saying that her inflation outlook was now "broadly consistent with the central projection.” Deputy governors Dave Ramsden and Sarah Breeden, who have previously tilted dovish, both came on board in backing a cut but Deputy Governor Huw Pill stood his ground in opposing easing, warning of structural changes in wage bargaining despite BOE staff analysis indicating that the unusual strength of wage growth appeared to be a lagged response to previous labour market conditions.