Bank of England holds interest rates at 3.75%

The central bank said it was keeping rates unchanged to make sure that inflation stays around its target level of 2%.

The Bank has also cut its outlook for UK economic growth for 2026, from 1.2% to 0.9%, and for 2027, from 1.6% to 1.5%.

It comes as policymakers face a “balancing act” of controlling inflation and supporting economic growth.

New forecasts from the Bank’s Monetary Policy Committee (MPC) show the rate of Consumer Prices Index (CPI) inflation dropping to the target this year, having previously said this would happen in 2027.

The MPC thinks that measures announced in the Chancellor’s autumn budget will help to slow inflation, particularly a package of support to bring down household energy bills from April.

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Andrew Bailey, the Bank’s 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 interest rates unchanged at 3.75% today.

“All going well, there should be scope for some further reduction in the bank rate this year.”

The decision to hold rates had been largely expected after the latest inflation data revealed that prices rose at 3.4% on the consumer price index measure in December, far above the Bank’s 2% target.

The Bank is also expecting the unemployment rate to rise to 5.3% this year, having said in November that it would peak at 5.1%

Evidence that the labour market is cooling is likely to be encouraging news for policymakers because it indicates that some pressures on inflation are reducing, but they will also be cautious of it weakening economic growth.

Central banks typically use elevated interest rates to bring down inflation but reduce them if inflation is dropping too quickly or there is a need to stimulate further economic growth.

The Bank has cut interest rates six times over the past 18 months after rates peaked at 5.25%.

It has indicated rates are still “likely” to be reduced further this year despite the latest decision to hold.

Chancellor Rachel Reeves is hoping for further rate drops in the coming months after imposing mutiple inflation-cutting measures in her November budget, such as slashing utility bills.

Ms Reeves has previously vowed to make 2026 the “year that Britain turns a corner” on inflation.

Inflation was most recently recorded at 3.4% in December but is set to drop more quickly from April, partly due to the impact of new energy bills support from the budget, which is set to reduce the typical annual household energy bill by £134.

Measures linked to the budget will contribute to a roughly 0.5 percentage point drop in the inflation rate.