MPC meeting: a 91ӰӘhold91Ӱә lot of dovishness
As we expected, the Monetary Policy Committee (MPC) voted to hold interest rates at 3.75%. However, the vote 91Ӱӓ at 5-4 91Ӱӓ was closer than we91Ӱәd thought. UK economic growth has been stronger than anticipated since the last MPC meeting. There have also been few signs of a labour market collapse. This allowed the MPC to keep rates level. It91Ӱәs now a coin toss as to whether the next rate cut comes in March or April. Looking ahead, the chances of a second cut this year have risen sharply.
Latest MPC Minutes suggest dovish hold
Since the MPC last met in December, growth had surprised to the upside, inflation remained sticky − albeit slightly lower than the MPC91Ӱәs forecast − and the UK labour market had shown little sign of collapse, which made it a no-brainer that the Bank of England (BoE) would hold rates at 3.75%.
The most interesting part of the meeting was the vote split at 5-4, closer than the consensus (7-2) and we (6-3) had expected. What91Ӱәs more, the latest signal a dovish shift on the committee. Phrases in the guidance such as 91ӰӜthe risks from greater inflation persistence had become less pronounced91Ӱӝ and 91ӰӜBank Rate is likely to be reduced further91Ӱӝ make it clear that the MPC is becoming much less worried about inflation and more concerned about the weakening labour market.
Governor Bailey and external MPC Member Catherine Mann made the case that 91ӰӜthe weight of evidence was yet sufficient to warrant reducing Bank Rate91Ӱӝ, suggesting that it91Ӱәs no longer a matter of if they will vote to cut rates, but when. Given the four doves on the MPC will almost certainly vote for a cut again in March, it won91Ӱәt take much for either Bailey or Mann to shift camps at the next meeting. In any case, if they hold in March, they will almost certainly vote to cut rates in April.
More UK interest rate cuts to come in 2026?
Looking ahead, Thursday91Ӱәs meeting opened the door to more easing than we91Ӱәd expected. There are a few reasons why.
First, the BoE now sees inflation reaching 2% in April and staying there, despite fuel duty increases and a new electric vehicles (EV) pay-per-mile scheme set to push up medium-term inflation. What91Ӱәs more, the latest projections were conditioned on Bank Rate reaching 3.3% this year 91Ӱӓ closer to two cuts than one 91Ӱӓ suggesting that two cuts is now the base case. Inflation stabilising − and potentially even dipping below 2% at the crucial two-year horizon − under that assumption suggests more room for further cuts than previously expected.
Second, the doves are still unconvinced by the hefty downwards revisions. MPC Member Dave Ramsden stated that he judged 91ӰӜrisks to the latest central projection for inflation as now tilted to the downside91Ӱӝ, a view external MPC Member Alan Taylor seemingly agreed with. Both members judge neutral to be 3%, so a much faster pace of easing remains in play if their views materialise.
Finally, the BoE judges activity to remain weak in the near-term, pencilling in growth of just 0.9% in 2026 and an unemployment rate that will continue to rise in the near-term. Indeed, a greater degree of slack than previously expected will encourage rate-setters to cut a little deeper to support the economy.
That said, the BoE will have to be cautious as Bank Rate approaches neutral, which we think is somewhere around 3.25−3.5%. If the MPC accidentally cuts too far, then it risks allowing inflationary pressure to regain momentum. This will ensure a high bar to rate cuts. Deputy Governor Clare Lombardelli has repeatedly emphasised that she is most concerned about 91ӰӜthe risks to credibility from any potential policy reversal that is not in response to a new shock91Ӱӝ. These worries will only grow across the MPC with further rate cuts.
All told, this dovish hold means that we pencil in a second cut later this year, although the timing is unclear. However, it91Ӱәs not hard to imagine a scenario where pay growth comes in above the BoE91Ӱәs central projection as suggested by both its Agents91Ӱә report and Decision Maker Panel. That would push up on domestically generated inflation and prompt a slower pace of rate cuts.