Will the Bank of England cut rates this week?

Key points

• Bank of England widely expected to leave interest rates unchanged on Thursday, 5 February, and reiterate its cautious approach to cutting

• Market pricing indicates another cut to come in this cycle but falling inflation and rising unemployment may prompt more easing ahead

Following four rate cuts last year, the Monetary Policy Committee (MPC) is anticipated to keep its baseline rate on hold at 3.75% on Thursday, so the focus is on whether they signal the path is open to further cuts this year. 

In December the MPC voted narrowly (5-4) to cut rates by 25bps but warned that further cuts would be a “closer call”. This was a more hawkish than expected. Perhaps two dissenters from the more dovish extreme of the committee could vote for a cut this time but I think the committee is pretty much aligned behind a cautious approach to cutting - in December it noted that the "cadence of rate cuts" would slow. Given the quarterly pace of cuts in this cycle, back-to-back cuts are therefore unlikely. The BoE is likely to signal it’s open to another cut in March or April, but beyond that it’s a lot less clear. 

Whilst the incoming data since then has not cleared the hurdle for a rate cut this week, conditions are likely to evolve in a way that justifies further cuts this year. The task for the Bank is in determining whether weakness in the labour market will warrant looser monetary policy, at the same time as business surveys suggest an uptick in activity.

Early estimates indicate the number of payrolled employees fell 184,000 in December from the same month a year earlier, with a 43,000 drop since November 2025.The unemployment rate rose to 5.1% in the three months to October, a four-year high and up from 4.4% a year earlier. Meanwhile earnings growth is decelerating, with private sector wage growth excluding bonuses slowing to 3.6% in the three months to November, down from 3.9% in the three months to October. With markets pricing in just one more cut this year, it would seem that futures are not factoring in the slowdown in domestic demand that these data indicate.

Balancing this deterioration in the labour market are signs of an improvement in economic activity. 

Today’s S&P Global Manufacturing PMI rose to a 17-month high of 51.8 in January, with new export business rising for the first time in four years. Business confidence also recovered to its best level since before the 2024 Autumn Budget. However, headcounts still fell, albeit reductions falling to the slowest pace in 15 months. Latest GDP figures also showed a surprise uptick in growth in November of +0.3%.

A regular survey of annual pay conditions – not available to us until Thursday – will be a key factor for this week’s meeting. A monthly survey indicates wage growth expectations at 3.7%, which remains too high for the MPC.

And despite inflation being forecast to return to the 2% target this year, a surprise uptick in December’s CPI is likely to weigh on the decision this week and ensure that there is no appetite to cut. Moving forward, however, headline inflation will fall sharply over the coming months.

Coming alongside the decision will be Bank’s quarterly monetary policy report, with updated inflation targets and forecasts for the UK economy. The inflation forecast is likely to be lowered from the November report and may show inflation falling below the Bank’s 2% target this year due to the impact of measures in the Budget to freeze rail fares and delay fuel duty hikes, as well as lower energy costs and a stronger pound. What the BoE forecasts will be material to shaping policy expectations.

The meeting should provide some clarity over the pace and timing of future rate cuts, however I would stick to the view that the MPC will cut more aggressively than their own cautious view would indicate. The MPC is likely to reiterate previous guidance that it’s close to the end of the cutting cycle, but this may prove wishful thinking as the economy slackens and jobs market cools further.

Summary view: The Bank will reiterate forward guidance and signal more easing to come but won't nail its colours to a cut in March. This could be regarded as net hawkish, continuing the cautious message from the December meeting. There has not been enough data since then to warrant speeding up the pace of cuts. The Bank will however have to change its tune as inflation will materially soften and unemployment rise further, even if there some signs the economy is flickering to life.

Market impact: A dovish BoE - giving a strong signal on need for further cuts this year by lowering inflation and growth expectations - would push gilt yields lower and be sterling negative, although in terms of GBPUSD sentiment around the dollar remains very volatile so it's not a clear line of sight. We should also note the European Central Bank is also in action this week, albeit no change is expected. 10yr gilt yields sit around 4.50% this morning after rising a touch through the late January volatility, but could retest their 52-week lows at 4.32% should BoE sound dovish, which would offer support to bond proxies such as Utilities and Housebuilders.