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BoE Holds Rates at 3.75% in Wait-and-See Mode; Dovish Split Hints at Significantly Increased Odds of Q2 Cut

By AI Insights

2026-02-06

Trend analysis based on the updated indicator. View the Indicator→

According to the latest DataTrack data, as of January 31, 2026, the BoE Base Rate has remained at 3.75% for two consecutive months with no further changes. Looking back over the past year, UK interest rates were lowered from a high of 5.25% in 2024, entering an observation period after falling to 3.75% in November 2025. In the Monetary Policy Committee (MPC) meeting just held in early February, although the central bank decided to keep rates unchanged, the voting result presented a rare 5:4 split (5 votes to hold, 4 votes advocating a cut to 3.5%). This indicates that the dovish faction within the decision-making body has significantly gained ground, and calls for restarting easing are growing day by day.

Detailed data shows that the main reason supporting this "hawkish pause" lies in the stickiness of services inflation, and the CPI data for December 2025 recorded 3.4%, which remains above the central bank's target. However, forward-looking indicators have shown signs of weakness: the UK unemployment rate recently climbed to 5.1% and is estimated to touch a high of 5.3% in Q2, reflecting a cooling labor market. At the same time, benefiting from falling energy prices and the lagging effects of the government budget, the central bank's latest forecast shows that inflation will quickly fall back to the 2% target range in the second quarter of 2026 (spring), providing data support for subsequent rate cuts.

Regarding this decision, market interpretations are tending towards consensus. Analysis from Goldman Sachs and Deutsche Bank points out that although Governor Andrew Bailey cast the decisive vote to keep rates unchanged, he simultaneously signaled that "cooling inflation is good news," implying that a policy pivot is only a matter of time. The MUFG research team believes that such a close vote count (5:4) is typically a leading indicator of a policy turning point, meaning the central bank's concerns about inflation persistence have significantly eased, shifting focus to the risks of slowing economic growth.

Looking ahead, in the short term (1-2 months), market focus will lock onto the March and May meetings. Since 4 members have already expressed support for a rate cut, just one more weak inflation or employment data print could very likely precipitate a 25 basis point cut, pushing the rate down to 3.5%. In the medium term (3-6 months), as inflation stabilizes back to 2% in Q2, institutions generally expect interest rates to be gradually lowered to a Terminal Rate of 3.25% by the end of 2026. However, if wage growth slows less than expected, the central bank may still adopt a "stop-and-go" rate cut path to avoid a resurgence of inflation.

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