BoE expected to keep interest rate steady amid sticky inflation, cooling job market
|- The Bank of England is expected to keep its policy rate at 3.75%.
- UK inflation figures remain well above the BoE’s target.
- GBP/USD regains part of last week’s losses, hovering around 1.3700.
The Bank of England (BoE) will deliver its first monetary policy decision of 2026 on Thursday.
Most analysts think the ‘Old Lady’ will sit tight, keeping the base rate at 3.75% after the cut delivered back on December 18. Alongside the decision, the bank will also release the Minutes, which should shed a bit more light on how policymakers weighed the arguments around the table.
Markets are firmly priced for no move this time. However, the case for further easing hasn’t gone away, even if the BoE chooses to stay patient for now, as the UK economy struggles to gain any real traction and the fiscal backdrop continues to darken.
Inflation keeps running hot
The BoE’s December rate cut was a close-run thing. The 25 basis point move, which took the bank rate down to 3.75%, was carried by a narrow 5–4 vote. Indeed, members Breeden, Dhingra, Ramsden and Taylor all backed a cut, but it was Governor Bailey’s switch that proved decisive, underlining just how finely balanced the debate around further easing has become.
The message from the guidance was still cautiously dovish but noticeably more conditional. Policymakers stuck with the idea that rates are likely to move lower over time, describing a “gradual downward path”, while making it clear that each additional cut will be harder to justify. As policy drifts closer to neutral, the room for manoeuvre is shrinking, and the judgement calls are getting tougher.
The macro backdrop allows for further easing, but not with haste. Growth momentum has faded, with the economy expected to flatline in Q4, and inflation is projected to fall back more quickly in the near term, moving closer to the target by mid-2026. At the same time, lingering inflation bumps and a labour market that is only cooling slowly argue against flagging an aggressive cut cycle.
All told, December looks less like the start of a rush to ease and more like a careful recalibration. The Bank is still edging in an easier direction, but with rising caution as rates approach neutral and decisions become ever more dependent on incoming data.
According to the BoE’s Decision Maker Panel (DMP) published on January 8, businesses are growing a touch less punchy on pay, as firms now expect wages to rise by 3.7% over the 12 months from the final quarter of 2025, a shade lower than the pace they were expecting just a month earlier.
Additionally, companies are reducing their expectations for price increases in the upcoming year, which resulted in a 0.1 percentage point decrease to 3.6% in the three months to December.
And it’s not just wages and prices. Firms have also become slightly more cautious on hiring, with expectations for employment growth over the next year softening a little, according to the survey.
How will the BoE interest rate decision impact GBP/USD?
Many people expect the BoE will keep the reference rate at 3.75% when it makes its announcement on Thursday at 12:00 GMT.
The real focus will be on how the MPC votes, since a hold is already fully priced in. If the British Pound (GBP) moves in a way that isn't expected, it could be because it suggests a change in how policymakers are getting ready for future decisions.
Pablo Piovano, Senior Analyst at FXStreet, notes that GBP/USD has come under fresh downside pressure soon after hitting yearly peaks near 1.3870 in late January, an area last traded in September 2021.
“Once Cable clears this level, it could then attempt a move to the September 2021 high at 1.3913 (September 14) ahead of the July 2021 peak at 1.3983 (July 30)”, Piovano adds.
On the other hand, Piovano says that “the critical 200-day SMA at 1.3421 emerges as the immediate contention in case sellers regain the upper hand prior to the 2026 floor at 1.3338 (January 19).”
“Meanwhile, the Relative Strength Index (RSI) near 61 suggests further gains remain in the pipeline in the near term, while the Average Directional Index (ADX) near 30 indicates a pretty strong trend,” he concludes.
Inflation FAQs
Inflation measures the rise in the price of a representative basket of goods and services. Headline inflation is usually expressed as a percentage change on a month-on-month (MoM) and year-on-year (YoY) basis. Core inflation excludes more volatile elements such as food and fuel which can fluctuate because of geopolitical and seasonal factors. Core inflation is the figure economists focus on and is the level targeted by central banks, which are mandated to keep inflation at a manageable level, usually around 2%.
The Consumer Price Index (CPI) measures the change in prices of a basket of goods and services over a period of time. It is usually expressed as a percentage change on a month-on-month (MoM) and year-on-year (YoY) basis. Core CPI is the figure targeted by central banks as it excludes volatile food and fuel inputs. When Core CPI rises above 2% it usually results in higher interest rates and vice versa when it falls below 2%. Since higher interest rates are positive for a currency, higher inflation usually results in a stronger currency. The opposite is true when inflation falls.
Although it may seem counter-intuitive, high inflation in a country pushes up the value of its currency and vice versa for lower inflation. This is because the central bank will normally raise interest rates to combat the higher inflation, which attract more global capital inflows from investors looking for a lucrative place to park their money.
Formerly, Gold was the asset investors turned to in times of high inflation because it preserved its value, and whilst investors will often still buy Gold for its safe-haven properties in times of extreme market turmoil, this is not the case most of the time. This is because when inflation is high, central banks will put up interest rates to combat it. Higher interest rates are negative for Gold because they increase the opportunity-cost of holding Gold vis-a-vis an interest-bearing asset or placing the money in a cash deposit account. On the flipside, lower inflation tends to be positive for Gold as it brings interest rates down, making the bright metal a more viable investment alternative.
Economic Indicator
BoE Monetary Policy Report
The Bank of England publishes a quarterly report which includes a detailed economic analysis on which the Bank's Monetary Policy Committee (MPC) bases its interest rate decisions. More importantly, the report also presents an assessment of the prospects for UK inflation over the following two years. Elevated inflation projections are generally bullish for the Pound Sterling (GBP) as they imply higher interest rates. Likewise, low inflation expectations are bearish for GBP.
Read more.Information on these pages contains forward-looking statements that involve risks and uncertainties. Markets and instruments profiled on this page are for informational purposes only and should not in any way come across as a recommendation to buy or sell in these assets. You should do your own thorough research before making any investment decisions. FXStreet does not in any way guarantee that this information is free from mistakes, errors, or material misstatements. It also does not guarantee that this information is of a timely nature. Investing in Open Markets involves a great deal of risk, including the loss of all or a portion of your investment, as well as emotional distress. All risks, losses and costs associated with investing, including total loss of principal, are your responsibility. The views and opinions expressed in this article are those of the authors and do not necessarily reflect the official policy or position of FXStreet nor its advertisers.