The Bank of England has held interest rates at 3.75% but predicted more cuts will be made later this year.
The reductions are “likely”, the Bank said, due to inflation being expected to reach the target 2% by April, as a result of cuts to energy prices announced in the Budget last November.
The decision was a narrow one with five members of Monetary Policy Committee (MPC) voting to keep rates at the level set in December, and four backing a 0.25 percentage point cut to 3.5%.
Andrew Bailey, Bank of England governor, said:
“We now think that inflation will fall back to around 2% by the spring. That’s good news.
“We need to make sure that inflation stays there, so we’ve held rates unchanged at 3.75% today. All going well, there should be scope for some further reduction in the Bank rate this year.”
Reaction to interest rates held at 3.75%
David Bharier, head of research at the British Chambers of Commerce, said:
“Holding the interest rate at 3.75% was expected as the Bank grapples with the twin challenges of domestic cost pressures and an unpredictable global outlook.
“Our data show that a majority of firms still expect to raise their prices, with labour costs cited as the top cost pressure. Meanwhile, tariff threats are already prompting contingency planning and risk pushing prices higher if retaliation follows.
“That leaves the Bank facing a difficult trade-off. Businesses tell us inflation risks are likely to persist in the short term, but a lower interest rate will be a key part of kickstarting the economy. However, today’s more optimistic MPC forecast, predicting inflation returning to target by April, will be welcomed by the firms we represent.
“For businesses across the UK, greater policy certainty and a clear path to lower borrowing costs are essential to unlock investment, boost productivity and transform trade.”
Mike Randall, CEO at Simply Asset Finance, said:
“This rate hold provides some crucial breathing room, helping businesses capitalise on the positive shoots of economic growth we’ve seen in recent weeks.”
“Further anticipated rate cuts and cheaper borrowing costs will also help to offset the cost pressures SMEs have been forced to absorb – empowering firms to invest in productivity, rather than simply staying afloat
“However, with over half of SMEs doubting their loan approval chances, the industry must now help to change SMEs’ perspective on finance. Banks, lenders and brokers must collaborate to ensure businesses know funding is not only accessible to them but guide them on how it can be used effectively to unlock their full potential.”
Neil Rudge, chief banking officer at Shawbrook, said:
“The larger-than-expected rise in the latest inflation reading will have reinforced the MPC’s decision to keep rates on hold. While there are clear signs of cooling in the labour market, today’s decision underlines that bringing inflation sustainably back to target remains the Committee’s overriding priority.
“For SMEs, this means continued pressure on costs and cashflow at the start of 2026. However, the direction of travel for interest rates still appears to be downwards, provided inflation continues to ease. As conditions gradually improve, businesses will be better placed to make considered investment decisions, and access to funding that reflects their individual circumstances will remain an important part of navigating what is still a complex economic environment.”