Unemployment is now at 5.1%, its highest level since early 2021 (Image: Getty)
The Bank of England is expected to keep interest rates on hold this week – but is likely to hint that cuts are coming later this year.
A cut in the spring, which would benefit millions of home buyers and borrowers, is on the cards, although this will depend on evidence confirming expectations that inflation is on its way down.
City economists widely expect the Monetary Policy Committee (MPC) to leave the base rate unchanged at 3.75% on Thursday, as policymakers grapple with contradictory signals from the UK economy – firmer growth on one hand, but a weakening jobs market on the other.
Unemployment is now at 5.1%, its highest level since early 2021, while hiring continues to deteriorate. At the same time, surveys suggest business activity has picked up since the November Budget, putting the MPC in a difficult position as it tries to steer inflation back to its 2% target without choking off growth.
The Bank cut rates by a quarter point in December, taking Bank Rate down to 3.75% from 4.00%, after inflation cooled.
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Consumer price inflation stood at 3.4% in December, down from a summer peak of 3.8%, but policymakers warned future decisions would be a “closer call” as the easing cycle nears its end.
The nine-member MPC is split between those who believe rising joblessness will help keep inflation in check – strengthening the case for lower rates – and those who fear that improving economic momentum and firm wage growth could keep price pressures alive.
Business surveys point to renewed momentum. The S&P PMI composite index rose to 53.9 in January, its highest reading since April 2024, while official figures show GDP grew by 0.3% in November.
However, the labour market continues to soften. The number of payrolled employees fell by 155,000 in November 2025 compared with a year earlier, according to the Office for National Statistics, and the redundancy rate climbed to 4.9 per thousand employees, up from 3.8 previously.
Private sector wage growth, closely watched by the Bank as a gauge of inflationary pressure, slowed to 3.6% excluding bonuses in the three months to November, down from 3.9% in the previous period.
Even so, the Bank’s own survey of businesses suggests pay rises of 3.7% this year, with its regional agents reporting average settlements of 3.5% – still above the Bank’s comfort zone.
Andrew Wishart, economist at Berenberg, said the current data did not yet justify another immediate cut but suggested the picture would change.
“Although the incoming data do not justify an imminent further rate cut, we expect the story to change as the year progresses,” he said. “It will be difficult for spending and activity to maintain momentum.”
Rob Wood of Pantheon Macroeconomics said the MPC is likely to repeat its cautious message.
“We expect the MPC to reiterate its previous guidance that another Bank Rate cut is likely but the rate cycle is probably close to an end,” he said.
Bloomberg economists and major banks expect the MPC to vote to hold rates, with forecasts pointing to a split decision but no change. Some predict a 7–2 vote, others 6–3, with a minority again pushing for an immediate cut.
The Bank believes inflation will fall back towards 2% next quarter, helped by Budget measures such as delayed fuel duty rises and a rail fare freeze.
Its new forecasts, published alongside Thursday’s decision, are expected to show inflation at or even below target later this year – potentially opening the door to a cut as early as March or April.
However, once rates fall to around 3.5%, economists warn the outlook becomes more uncertain, as borrowing costs approach so-called “neutral” levels that neither stimulate nor restrain the economy.
