Bank of England Moves Closer to Rate Cuts
By Krzysztof Kamiński | 6 February 2026
Summary
The Bank of England (BoE) is nearing a decision to cut interest rates, as indicated by a recent Monetary Policy Committee (MPC) vote that ended in a narrow 5-4 decision to maintain the policy rate at 3.75%. New forecasts suggest inflation could drop below the 2% target by April, increasing the likelihood of a rate cut as early as March.
Economic Outlook
The UK’s economic situation is deteriorating, with the BoE revising its GDP growth forecast for 2026 down to 0.9% and predicting a rise in unemployment to 5.3%. This weakening labor market supports the case for further monetary easing.
Market Reactions
Following the BoE's dovish stance, the pound experienced volatility. Initially, the probability of a March rate cut surged to over 50%, leading to a 0.9% decline in GBP/USD. However, the pound later recovered some losses, indicating market uncertainty.
Inflation and Growth Projections
The BoE's inflation forecasts show a decline from the current rate of 3.4% to around 2% by April, with expectations of remaining below this target through 2029. Concurrently, the GDP growth forecast has been reduced, and the labor market is showing signs of stress, suggesting a potential over-tightening of the economy.
Factors Influencing Disinflation
Disinflation is attributed to both market dynamics and government actions, such as cuts in regulated energy prices. A survey indicates that companies are planning minimal price increases, reflecting easing cost pressures.
Future Implications
Despite the dovish outlook, not all policymakers agree on the timing of rate cuts. Chief economist Huw Pill cautions against rapid easing, highlighting that some disinflation may be temporary. The upcoming macroeconomic data will be crucial for determining the BoE's next steps and the future trajectory of the pound.
Conclusion
The BoE's recent decisions indicate a shift towards a more accommodative monetary policy, with the focus now on the timing and pace of potential rate cuts. This environment is likely to create increased volatility for the pound as market participants react to forthcoming economic data.