5th Feb 2026 14:07
(Alliance News) - Bank of England Governor Andrew Bailey suggested he needed to "see more" to have the conviction to cut on Thursday, but sounded confident about a sustained return to the central bank's inflation target.
The BoE left bank rate unchanged at 3.75% on Thursday, by a slim 5-4 majority. Bailey once more proved crucial as he supported leaving rates on hold, after backing a cut in December.
Bailey was joined by Megan Greene, Clare Lombardelli, Catherine Mann and Huw Pill in voting in favour of leaving rates unchanged. Sarah Breeden, Swati Dhingra, Dave Ramsden and Alan Taylor put the case for a quarter point cut.
Despite the hold, Bailey in a post-decision press conference said "disinflation is on track and is running ahead of the schedule expected in November".
However, he added that service price inflation and wage growth need to "fall further" for the Monetary Policy Committee to be confident of a return to the inflation target.
The BoE expects a return to the 2% target in April, "owing to developments in energy prices including from budget 2025".
UK consumer price inflation accelerated to 3.4% in December, from 3.2% in November.
The BoE expects an inflation rate of 2.1% in the second quarter, 0.7 percentage points lower than its November forecast.
It has a first quarter projection of 3.0%, lowered from a prior view of 3.1%. For the year after, its view has been lowered to 1.7% from 2.2%. For the first quarter of 2028, its view is 1.8%, lowered from 2.1%.
The BoE also lowered gross domestic product growth forecasts. It now sees 2026 GDP growth at 0.9%, down from a prior 1.2% forecast. The growth forecast for 2027 has been cut to 1.5% from 1.6%, but for 2028, it has been lifted to 1.9% from 1.8%.
It lifted its jobless rate forecast to 5.2% for the first quarter, 5.3% for the year after and 5.1% for the first quarter of 2028. Its prior forecast was for 5.0% in the first quarter of 2026, the same rate for 2027 and 4.9% for 2028.
"The unemployment rate is projected to peak in the second half of 2026, at around 5.25%, before declining gradually. Unemployment remains above bank staff’s assumed medium-term equilibrium rate by the end of the forecast period, though there is uncertainty surrounding this estimate," the BoE said.
Bailey denied that the BoE is content with a lofty jobless rate.
"I do not for a moment go around anywhere saying 5.3% unemployment is the price worth paying," Bailey told reporters. "None of us want to see unemployment any higher, frankly."
Market pricing suggests a couple of BoE cuts, taking bank rate to 3.25%. Bailey did not endorse this view.
"I'm not going to endorse 3.25%, but I think there it is a reasonable sort of market curve at the moment, but we'll see where it ends up," Bailey told reporters.
Bailey affirmed that he "would need to see more evidence in my view" that inflation is sustainably returning to target. The BoE did say, however, that further cuts are likely.
"The extent and timing of further easing in monetary policy will depend on the evolution of the outlook for inflation," the BoE said.
Bailey said the current predicament the bank finds itself in harks back to more mundane periods for policymakers, when big economic shocks were not as prevalent.
"In some ways this is taking us back to what I might call a normal state of affairs in terms of judgements we have to make," the BoE governor said. "We're not talking about big shocks here, but we are talking about how things pass through."
Also on Thursday, the European Central Bank left rates unmoved. The widely forecast decision by the Frankfurt-based central bank keeps the deposit facility rate at 2.00%, the main refinancing operations rate at 2.15% and the marginal lending facility at 2.40%.
BoE policymakers were questioned on the gap between UK and eurozone rates.
BoE Deputy Governor for Monetary Policy Clare Lombardelli said: "They're in different places, that reflects the fact the economies are very different, both structurally and in terms of where they are in the cycle. We still have inflation at 3.4%.
"There's also other structural things that are different in the economy. Supply is quite different and supply capacity is quite different."
Another central bank, the US Federal Reserve, was also a theme in the press conference. US President Donald Trump named Kevin Warsh as his nominee to lead the Fed, replacing Chair Jerome Powell, whose term ends in May.
Bailey said: "I welcome the nomination of Kevin Warsh."
By Eric Cunha, Alliance News news editor
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