Bank of England holds interest rates at 3.75% in narrow 5-4 vote

The Bank of England's Monetary Policy Committee has voted 5-4 to maintain Bank Rate at 3.75%.

After cutting the base rate to its lowest level in almost three years in December, the Committee decided to hold rates at its latest meeting this week.

The vote was tighter than industry experts had predicted, with four members voting to reduce Bank Rate by 0.25 percentage points, to 3.5%.

Dhingra, Taylor, Ramsden, and Breeden all supported a 25bps cut, with Governor Andrew Bailey’s swing vote securing the 5-4 decision to hold, contrary to analysts’ expectations of a 7-2 outcome.

Headline CPI inflation increased from 3.2% to 3.4% in December, with the jump higher than many economists had expected.

However, the Committee noted that CPI inflation is expected to fall back to around the 2% target from April, owing to developments in energy prices including from Budget 2025. 

In its minutes, the MPC said "the risk from greater inflation persistence has continued to become less pronounced, while some risks to inflation from weaker demand and a loosening labour market remain".

It added: "The restrictiveness of policy has fallen as Bank Rate has been reduced by 150 basis points since August 2024. On the basis of the current evidence, Bank Rate is likely to be reduced further. Judgements around further policy easing will become a closer call. The extent and timing of further easing in monetary policy will depend on the evolution of the outlook for inflation."

Kevin Brown, savings expert at Scottish Friendly, said "this pause shouldn’t be mistaken for a change in direction". He added: "The labour market is cooling, wage growth is slowing, and inflation is anticipated to fall this year as price pressures fade. “If that plays out as expected, one or two further cuts later this year are still on the cards, with spring still the most likely window for the next move."

Mark Harris, chief executive of mortgage broker SPF Private Clients, commented: “There was a slim chance that the Bank of England would cut interest rates this month with ongoing concerns over inflation, which rose to at 3.4% in the year to December, meaning caution prevailed.

“However, we are hugely encouraged by four members voting for a reduction in base rate to 3.5% and hope more of the Committee come round to their way of thinking in due course. Market expectations are for a further quarter-point reduction at the April meeting with perhaps one or two more reductions this year, with base rate potentially settling at around 3%."

Charlie Ambler, co-chief investment officer and partner at wealth management firm Saltus, said: “The Bank of England now finds itself in a more delicate phase of the easing cycle. Progress on services inflation and wage growth remains key, and with headline inflation ticking higher last month.

“Short term fluctuations in inflation data are unlikely to alter the broader direction of travel, but the Bank will be keen to reinforce its commitment to a gradual and measured approach to rate cuts. The full disinflationary impact of the tax measures announced in the Autumn Budget has yet to feed through, which means policymakers are likely to strike a cautious tone in their forward guidance. How confident the Bank sounds that inflationary pressures are being brought under control will be closely watched by markets."

Paresh Raja, CEO of Market Financial Solutions, added: "Given the historic lows we saw between 2008 and 2022, it's understandable that there remain loud calls for the base rate to fall further and further. But a mindset shift is perhaps required - the Bank of England is not going to rush to cut the base rate, and when we zoom out and look at the last three or four decades, we see that the cost of borrowing today is highly competitive. Positively, we are seeing greater pragmatism, with brokers and borrowers having adapted well to the rates on offer across the mortgage market, aided by the fact that these rates have been largely stable for more than a year.

"The market is in a strong position. The data suggests that transactional activity is still somewhat subdued, but prices are holding firm and we're certainly seeing healthy levels of demand among buyers and investors across the country. Base rate movements will always be influential, but should not overshadow broader market conditions, nor the need for lenders to double down on supporting clients to get deals done rather than waiting for the Bank of England's policymaking to shift."