The Bank of England's Monetary Policy Report for February 2026 outlines a cautiously optimistic outlook for UK inflation, projecting CPI to decline to 2.1% in the second quarter of 2026—a 0.7 percentage point sharper fall than forecasted in November.

This projection reflects lower energy prices, including impacts from Budget 2025, alongside evidence of subdued economic growth and increasing slack in the labour market. Pay growth and services price inflation have eased, reducing risks of persistent inflation, though some upside pressures persist from administered prices like Vehicle Excise Duty and water bills, contributing around 0.5 percentage points to the current overshoot above the 2% target.

Divided MPC Vote Signals Policy Crossroads

At its meeting ending 4 February 2026, the Monetary Policy Committee (MPC) voted by a narrow 5–4 majority to maintain the Bank Rate at 3.75%. Four members advocated a 0.25 percentage point reduction to 3.5%, underscoring debates over the pace of monetary easing as inflation nears target levels from April.

Market expectations align with further cuts, with forward rates implying Bank Rate at around 3.3% by late 2026, rising gradually to 3.7% by early 2029. Lending rates for households and corporates have fallen in line with prior Bank Rate reductions, supporting borrowing but with credit card rates lagging.

Subdued Growth and Labour Market Slack

UK GDP growth is expected to tick up slightly to 0.2% in Q1 2026, consistent with recent PMI data showing output around historical averages. However, Agents' contacts report weak confidence and subdued global demand, tempering near-term optimism.

Average weekly earnings (AWE) growth is forecast to slow to 3.2% by Q2 2026, informed by settlements data and anticipated pay drift. Firms' inflation expectations have dipped, with one-year-ahead CPI views at 3.2% and longer-term outlooks stable near target.

Business Investment Faces Headwinds

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, intentions have weakened sharply since late 2024, with firms prioritising efficiency over expansion amid an uncertain outlook.

This Monetary Policy Report, released today, reinforces the Bank's focus on balancing inflation control with economic support, positioning it as the pivotal UK finance development amid a landscape of modest growth forecasts and persistent cost pressures elsewhere.