The Bank of England maintained its policy rate at 3.75% in a closely contested decision, with four members voting for an immediate cut. The divided vote and dovish guidance suggest mounting pressure for easing as inflation approaches target.
Key Takeaways
- Policy Decision: MPC voted 5-4 to hold Bank Rate at 3.75%, with four members preferring a 25bp cut to 3.5%
- Inflation Outlook: CPI expected to fall sharply to 2.1% by Q2 2026 (down from 3.4% in December), driven primarily by energy measures from Budget 2025
- Forward Guidance: Committee signals Bank Rate “likely to be reduced further” though “judgements around further policy easing will become a closer call”
- Growth Forecast: GDP growth projected to strengthen gradually to around 1.9% by final year of forecast period
- Labor Market: Unemployment rate expected to peak around 5.3% in H2 2026 before declining
- Wage Growth: Target-consistent wage growth estimated at approximately 3.25%, close to current private sector pay growth of 3.6%
While the Bank of England technically maintained its policy stance, the decision was reached through a narrow 5-4 split, more divided than the expected 6-3 or 7-2 vote, effectively boosting the likelihood of a March rate cut.
Dovish MPC members Sarah Breeden, Swati Dhingra, Dave Ramsden and Alan Taylor called for a 0.25% reduction in borrowing costs while Andrew Bailey, Megan Greene, Clare Lombardelli, Catherine Mann and Huw Pill preferred to keep rates on hold.
Link to official BOE Monetary Policy Summary and MPC Minutes (February 2026)
What makes this particularly significant is that the shift in Committee sentiment appears driven less by recent data and more by new analytical frameworks presented in the February Monetary Policy Report.
Three key factors appear to have swayed the debate:
- Target-Consistent Wage Growth Analysis: The report establishes that wage growth compatible with the 2% inflation target sits around 3.25%—barely below current private sector pay growth of 3.6%.
- Wage-Setting Behavior Study: Machine-learning analysis of wage-setting patterns found little evidence of structural changes in how U.K. firms determine pay, countering a key argument from the hawkish camp.
- Output Gap Uncertainty: The report acknowledges greater uncertainty around spare capacity estimates while incorporating a slightly wider output gap throughout the forecast period compared to November.
Link to BOE Quarterly Monetary Policy Report (February 2026)
During the press conference, BOE Governor Bailey reiterated that he “will go into the coming meetings asking whether a cut is justified” and sees “scope for some further easing of policy.” He also mentioned that “the risks from inflation persistence appear to have continued to reduce.”
Link to BOE Press Conference (February 2026)
Market-implied probabilities of a March rate cut appear to have risen substantially following the February BOE decision, with analysts noting the narrow vote split and dovish guidance lowered the bar for near-term easing.
Market Reactions
British Pound vs. Major Currencies: 5-min
Overlay of GBP vs. Major Currencies Chart Faster with TradingView
The pound, which had been cruising slightly higher in the hours leading up to the BOE announcement, weakened across the board following the event, as the dovish MPC vote surprise and cautious forward guidance revived easing expectations.
GBP chalked up its steepest losses versus USD (-0.70%) and sustained its selloff after the press conference. The British currency saw a brief turn higher when Bailey’s remarks suggested that the March decision would be a live one, though bearish pressure picked up as markets recalibrated their interest rate outlook.
Sterling also saw significant declines against JPY (-0.63%) and CHF (-0.52%) while recouping some of its losses versus AUD (-0.27%) and NZD (-0.41%) as the London session progressed.
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