The Bank of England’s February 2026 Monetary Policy Report reveals that the Monetary Policy Committee (MPC) voted narrowly (5–4) to keep interest rates at 3.75%, with four members pushing for a cut to 3.5%. While inflation remains above the 2% target, it is expected to fall back to around target levels from April 2026, largely due to lower energy prices—including measures from Budget 2025—and easing wage and services inflation.
The report indicates that monetary policy is becoming less restrictive, with Bank Rate already reduced by 150 basis points since August 2024. Further cuts are likely, though the timing will depend on incoming data. The MPC emphasizes balancing risks: ensuring inflation returns sustainably to 2% without over-tightening and causing unnecessary economic weakness.
Major Points :
Interest Rate Decision:
Bank Rate held at 3.75%, but the vote was tight (5–4).
Four members voted for an immediate 0.25% cut.
Inflation Outlook:
CPI inflation was 3.4% in December 2025.
Expected to fall to around 2% from April 2026, helped by falling energy prices and Budget 2025 measures.
Core inflation pressures are easing, with pay growth and services inflation moderating.
Monetary Policy Stance:
Policy is still restrictive but becoming less so.
Further rate cuts are likely, but the MPC will proceed cautiously, monitoring data closely.
Key Judgements:
Risk of persistent inflation is fading, but risks from weaker demand and a loosening labor market remain.
Wage growth is cooling but remains above levels consistent with 2% inflation in the medium term.
Economic Activity:
GDP growth remains subdued.
Labor market is loosening, with unemployment expected to rise slightly.
Household saving is still high, suggesting cautious consumer spending.
Global and Financial Conditions:
Global growth has been resilient.
Financial conditions have eased slightly since November 2025.
Forecast Summary:
Inflation expected to be around 2% in 2026–2029.
GDP growth to pick up modestly.
Unemployment to peak near 5.3% in late 2026 before declining.
Risks Highlighted:
Inflation expectations remain elevated but should fall with headline inflation.
Uncertainty around wage-setting behavior and productivity growth.
Possible weaker-than-expected consumption and labor demand.
Boxes & Analysis:
Box A: Estimates “target-consistent” wage growth at around 3¼%.
Box B: Little evidence of structural change in wage-setting behavior among UK firms.
Box C: Productivity growth expected to remain subdued but with upside potential from AI.
Box D: Budget 2025 measures to lower inflation in the near term.
Box E: Monetary policy transmission indicators show past tightening still weighing on activity.
Box F: Forecast errors reviewed; Bank’s forecasts perform comparably to external benchmarks.
Key Takeaway:
The Bank of England is in a cautious easing cycle, with inflation approaching target and the economy showing signs of subdued growth. Further interest rate cuts are on the horizon, but the MPC remains data-dependent, balancing the risks of lingering inflation against those of excessive economic slack.
