The Bank of England is widely expected to keep interest rates on hold at 3.75% tomorrow, as its monetary policy committee (MPC) continues to tread cautiously despite signs that inflation is heading in the right direction.
While official data has shown a steady cooling in price pressures, the nine-member committee has been split on how far and how fast it should ease borrowing costs through 2026.
According to Simon French, chief economist at Panmure Liberum, "UK monetary policy remains restrictive in our view and, more importantly, in the view of the MPC." But beyond that point, consensus quickly breaks down.
The Bank began its rate-cutting cycle in August 2024 with a pattern of quarterly 25 basis point moves, but as the 'neutral rate' nears, French believes that pace is likely to slow in 2026.
Like some other economists, he envisions only two further cuts will come this year, bringing down the base rate to 3.25%. French's prediction is one in May and another in August.
Part of the hesitation lies in uncertainty over how restrictive policy still is. “Neutral is neither easily observable, nor stable,” French said. “The uncomfortable reality is that central banks around the world are guessing where the neutral level sits for their reference economy.”
There are also questions about whether inflation in the UK is structurally more persistent than in other G20 countries. Since 2010, the median inflation rate in Britain has been 2.6%, a full percentage point higher than during the Bank’s early inflation-targeting years. French points to “daft energy and labour market policy” as key drivers of that divergence.
Still, there are reasons to expect headline inflation to fall back soon.
April tends to be a defining month for UK inflation, with many regulated prices updated at once, such as last year when businesses passed on higher employer National Insurance costs to consumers.
This year, that pressure is easing. French expects a 6% fall in the regulated energy price cap in Q2, combined with Budget measures, to drag the annual inflation rate down from 3.0% in Q1 to around 2.4% in Q2.
The question is whether the MPC will act in anticipation of those effects, or wait for more data – and more political clarity.
After this week, the next scheduled MPC meetings are on 19 March and 30 April, with the latter coming just ahead of local elections and several weeks before April inflation figures are released.
“There is clearly a chance that the MPC will seek more clarity – both from economic data, and political events – and so wait until June,” said French. A move in August looks more straightforward, though global risks remain.
For now, the committee is expected to keep its powder dry, while markets and economists watch closely for any hints that the Bank’s stance is beginning to shift.
The chance of a rate hike this year, as seen in Australia this week and Japan in December, with New Zealand expected to join them.
French said a change in UK political leadership later this year could challenge that view.