The Bank of England has maintained interest rates at 3.75%, while noting that Labour’s increase in employers’ national insurance contributions has contributed to stagnant employment over the past year. This labor market weakness is factoring into the bank’s decision-making about future rate cuts.
The monetary policy committee’s 5-4 vote to hold rates revealed substantial internal disagreement about timing. Four members believed economic conditions already justified lower borrowing costs, while five preferred to wait. This division follows six previous rate cuts since the middle of 2024 and suggests that additional easing remains likely as the year progresses.
Governor Andrew Bailey focused on the inflation outlook in his post-decision remarks, projecting that inflation would fall to around 2% by spring. He characterized this as positive progress and suggested that maintaining low inflation should create opportunities for further rate reductions. However, he emphasized the need to ensure inflation remains stable at the target level before proceeding with additional cuts.
The Bank’s quarterly report highlighted the impact of higher employer costs on the labor market. The increase in national insurance contributions, combined with the rising minimum wage, has contributed to flat employment growth over the past twelve months. Policymakers expect these factors will continue to weigh on job creation and help moderate wage growth, which some had feared could cause high inflation to become entrenched in the economy.
Despite these labor market concerns, the inflation outlook is improving significantly. Chancellor Rachel Reeves’s budget measures, including utility bill cuts and rail fare freezes starting in April, are expected to drive inflation down to 2.1% by mid-2026. This represents a substantial decline from December’s 3.4% reading and brings inflation close to the 2% target. The unemployment rate is projected to rise to 5.3% this year, higher than the 5% previously expected, reflecting the challenging employment environment.