Shweta Singh, Chief Economist at Mercer UK, said: “The Monetary Policy Committee (MPC) voted 5 to 4 to leave the policy rate unchanged at 3.75%. The decision was in line with market expectations, but the vote was more dovish than expectations of a 7-2 vote. Ramsden and Breeden joined Dhingra and Taylor in calling for a rate cut. The MPC noted the risk from greater inflation persistence has continued to become less pronounced, while some risks to inflation from weaker demand and a loosening labour market remain. They retained the forward guidance on policy rates. Further easing will depend on the inflation outlook, but the Bank Rate is likely to continue a gradual downward path. Judgements on future easing will become a closer call. The revised forecast changes were dovish. The Bank lowered its inflation projections, in line with the messaging from the previous meeting and reflecting the Budget announcements. Headline CPI inflation is now expected to slow to 2.1% in Q2 2026 and fall below the BOE’s target in 2027. Meanwhile, growth forecasts were revised lower. The MPC now expects a slightly wider output gap over the forecast period than had been expected in November. The unemployment rate forecast was raised through the forecast horizon. Projections for the private sector regular pay was revised higher for this year to 3.3%, but lower for 2027-28. Front-end rates have rallied after the decision. Markets were pricing in ~37bps of rate cuts this year just before the decision and now expect ~46bps of rate reduction. The first-rate cut is expected in April. There could be room for more dovish pricing.”
Simeon Willis, Chief Investment Officer at XPS Investment said: “The Bank’s decision to hold rates was firmly in line with market expectations and is unlikely, in itself, to have a material impact on pension scheme investors. The more important story for schemes remains the longer-term direction of travel, rather than today’s pause. Whilst December’s CPI rose to 3.4% from 3.2%, this had in part been anticipated already due to Tobacco duty and rising airfares. That said, longer-term inflation expectations implied by the gilts market edged slightly higher over January. For defined benefit schemes, this is relevant, as even modest increases in long-dated inflation expectations can feed through into liability values, where they are linked to inflation.”
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