Bank of England to Hold Rates, But Is a March Cut Coming?

The Bank of England is widely expected to keep interest rates on hold this week, but the key question for markets is whether policymakers will signal an earlier-than-expected rate cut.

Based on the Bank's surprisingly hawkish tone in December, such a signal seems unlikely for now. While officials did cut rates, they hinted that the "cadence of rate cuts" could slow down—a cautious message for a central bank that was already moving slowly.

As interest rates approach a neutral level, the decision to cut further becomes more complex. With UK inflation at 3.4% in December, well above the target, hawks on the committee remain concerned that easing policy too soon could trigger a new wave of price pressures, mindful of the inflation spike in 2022.

Mixed Signals Keep the BoE on Hold

Since the last meeting, economic data has not provided a clear direction. A single round of data showed weak jobs numbers offset by stronger Purchasing Managers' Indices (PMIs). Inflation in December also came in slightly higher than anticipated.

A crucial metric for the Bank, the 'Decision Maker Panel' survey, revealed that corporate wage growth expectations are holding steady at 3.7%. This survey was cited multiple times in the previous meeting's minutes as a key reason for the Bank's cautious approach.

Given this backdrop, a 7-2 vote to keep rates unchanged is the most probable outcome. Known doves Alan Taylor and Swati Dhingra are almost certain to vote for a rate cut. Fellow dove Dave Ramsden might join them, although his comments after the December meeting suggested he was prepared to pause.

The Case for Looser Policy Is Building

Despite the current hesitation, there are compelling reasons to believe the Bank’s tightening cycle is over and rate cuts are approaching.

• Weakening Labor Market: Hiring surveys continue to deteriorate, suggesting last year's 1% decline in private sector employment will extend into 2026.

• Cooling Wage Growth: Private sector pay growth has already fallen from 6% at the start of 2025 to 3.6%. Forecasts indicate it will soon hit 3%, aligning with pre-COVID averages when the job market was strong but interest rates were much lower.

• Falling Inflation: Headline inflation is projected to drop dramatically from 3.4% in December to 1.8% by April. This is largely driven by lower food and water inflation, with food prices already running nearly a full percentage point below the Bank’s November forecast.

Core services inflation is also expected to moderate. While the most significant drops will appear in April's data, released in May, upcoming releases before the March meeting should provide early evidence of cooling prices, especially in key areas like restaurants and cafés.

A March Surprise Remains on the Table

In December, the Bank of England acknowledged that upside risks to inflation were diminishing. By the time policymakers meet in March, they will have two more rounds of data to confirm this trend.

A rate cut next month remains a distinct possibility—certainly higher than the 20% probability currently priced in by markets.

However, it is doubtful the Bank will explicitly open the door to a March cut this week. Officials are unlikely to alter their forward guidance, which emphasizes that decisions become more balanced as rates near neutral. In the subsequent press conference, Governor Andrew Bailey is not expected to talk up a March cut, despite his recent alignment with the doves. The Bank of England generally avoids commenting on market pricing unless it significantly deviates from its own thinking, which is not the case at present.

This week's mantra will likely be to keep all options on the table and let the incoming data guide future decisions.