Bank of England Holds Rates Steady at 3.5%, Warns of Enduring Inflation

Bank of England holds rates at 3.5% but warns inflation may now remain high through 2026, cooling expectations for near-term cuts.

Key Insights

  • Bank of England holds interest rates steady at 3.5% but hints at persistent inflation
  • BoE forecasts show inflation above 2% target through end of 2026
  • Sterling and UK bond yields rise as rate cut bets ease back

LONDON (MarketsXplora) – The Bank of England held interest rates steady on Thursday but warned that inflation is likely to remain elevated for longer than previously thought, cooling expectations for rate cuts this year.

The BoE’s Monetary Policy Committee (MPC) voted 7-2 to keep rates at 3.5%, confounding some expectations of a further hike to tame inflation. Still, a split vote signals growing debate within the MPC about the policy path ahead.

In updated forecasts, the BoE expects inflation to drop sharply to around 2% in the second quarter before picking back up again. It now sees inflation above the 2% target through late 2026 rather than 2025 predicted in November.

The outlook suggests the surge in prices over the past year may prove more persistent despite showing signs of having passed its peak.

“The MPC continues to judge that, provided the economy develops broadly in line with its latest projections, further increases in Bank Rate may be required for a sustainable return of inflation to target,” the bank said.

Sterling rose and bond yields climbed as traders trimmed bets that the BoE would opt to cut rates later this year to boost a weakening economy. The blue-chip FTSE 100 share index also gained ground.

Two MPC members – Swati Dhingra and Silvana Tenreyro – voted for a 25 basis point cut to borrowing costs to 3.25%, the first votes for an easing since the rate-hike cycle began in 2021.

But the BoE linked any potential rate cuts to three conditions – including declines in private sector wage growth and services price inflation as well as a rise in unemployment. While wage growth appears to be slowing, services inflation is seen picking back up again.

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