The Bank of England's Monetary Policy Committee (MPC) concluded its February 2026 meeting by maintaining the Bank Rate at 3.75%, with a narrow 5-4 majority vote. This decision reflects ongoing inflationary pressures despite recent economic slowdowns, as detailed in the freshly released Monetary Policy Report.

Persistent Inflation Drivers

Inflation exceeds the 2% target partly due to unusually large increases in administered prices, such as Vehicle Excise Duty and higher water bills, estimated to contribute around 0.5 percentage points to the overshoot. Food, beverage, and tobacco inflation adds a further 0.5 percentage points, while elevated labour cost growth—particularly in services—is pushing prices higher.

Bank staff project Average Weekly Earnings (AWE) growth to slow to 3.2% by Q2 2026, informed by recent pay settlements and expectations of pay drift. Firms' inflation expectations remain somewhat elevated, with one-year-ahead CPI forecasts at 3.2% from the DMP Survey and two-year-ahead at 2.5% in the Deloitte CFO Survey.

Modest Growth Outlook

Underlying GDP growth is expected to edge up to 0.2% in Q1 2026, aligning with the S&P Global Composite UK PMI rebound in January. However, Bank Agents' contacts anticipate subdued growth throughout the year, citing weak confidence and global demand weakness.

Business investment showed resilience at 2.7% growth in the year to Q3 2025, boosted by ICT and machinery spending amid falling financing costs. Yet, investment intentions have weakened sharply since Q4 2024, with firms prioritising efficiency over expansion amid an uncertain outlook.

Easing Financial Conditions

Market expectations point to Bank Rate falling to around 3.3% by H2 2026, with pass-through to corporate loans and mortgages already underway. Bank lending to businesses and households is picking up, supported by lower rates and improved credit availability, as per the Credit Conditions Survey Q4 2025.

This hold signals the MPC's caution amid sticky inflation, with potential rate cuts hinging on further evidence of cooling pressures. Businesses and households face a delicate balance of subdued growth and persistent price risks in the near term.