Bank of England Keeps Rates at 3.75% as Consumer Inflation Expectations Remain Elevated

The Bank of England has held interest rates unchanged at 3.75%, with some policymakers expressing concern that consumer inflation expectations remain elevated despite falling actual inflation. This disconnect is influencing the debate about the pace of future rate cuts.
The monetary policy committee’s 5-4 vote showed division over whether high inflation expectations warrant caution about easing. Megan Greene, voting to hold rates, specifically highlighted consumers’ persistent high inflation expectations as a concern. She warned that if these expectations aren’t managed carefully, they could lead to actual inflation remaining above target.
Four committee members, including Dave Ramsden, Sarah Breeden, Alan Taylor, and Swati Dhingra, disagreed and voted for an immediate cut. They believe actual inflation data showing improvement is more important than expectation surveys. This debate has occurred across six previous rate cuts since mid-2024.
Governor Andrew Bailey took a middle position, acknowledging the importance of inflation expectations while emphasizing the positive trajectory of actual inflation. He projected inflation would fall to around 2% by spring and suggested that as actual inflation remains low, expectations should adjust downward. Bailey indicated that conditions should allow for further rate cuts during the year.
The Bank forecasts inflation will decline to 2.1% by the second quarter of 2026, compared to 3.4% in December, driven largely by Chancellor Rachel Reeves’s budget measures including utility bill cuts and rail fare freezes from April. Economic growth is projected at just 0.9% this year, down from 1.2% previously, while unemployment is expected to reach 5.3%. Greene’s concerns about inflation expectations represent one factor arguing for caution, even as actual inflation improves dramatically.