BoE holds interest rates at 3.75%

The Bank of England (BoE) has voted to hold interest rates steady at 3.75%, after inflation rose to 3.4% in December.

The bank’s Monetary Policy Committee (MPC) voted by a majority of five to maintain the rate at 3.75%. Four members voted to reduce the rate by 0.25% to 3.5%.

In December, the bank had voted to cut rates from 4% to 3.75%, the lowest the level it had been since February 2023, and marking the fourth rate cut made that year. The cut came as UK inflation slowed more than expected to 3.2% in November. 

However, inflation increased to 3.4% in December, slightly higher than economists expected, driven up by food costs, and the prices of tobacco and airfares.

While the BoE noted this still above the 2% target, it said inflation is expected to fall back to around the target from April, following developments in energy prices, including from Budget 2025. 

Governor Andrew Bailey said: “My policy decision is based on accumulating evidence. Despite all the uncertainties in the world, we are not currently facing a situation in which monetary policy is being hit by big new shocks. Activity is subdued against a background of inflation returning to the target. I can see the case for the output gap having widened, but by how much is uncertain. 

“Although survey evidence on activity is pointing to a slightly more positive short-term picture, my central outlook is aligned with the staff’s view of weaker demand, leaving the risks more balanced. I expect to see quite a sharp drop in inflation over the coming months.”

He added: “While I am more confident in the overall path of wage disinflation, it is naturally less clear when and how much the expected upcoming drop in inflation will influence wage settlements. Overall, the risks from inflation persistence appear to have continued to reduce. I therefore see scope for some further easing of policy. This does not mean that I expect to cut the bank rate at any particular meeting. I will go into the coming meetings asking whether a cut is justified.”