Bank of England moves closer to rate cuts. March a real turning point for monetary policy and the Pound

• The Bank of England is very close to cutting interest rates – the MPC decision was taken by a 5–4 vote with the policy rate at 3.75%, and the new forecasts show inflation falling below the 2% target as early as April, significantly increasing the likelihood of a cut, potentially as soon as March.
• The UK’s economic outlook is clearly deteriorating – the Bank of England has lowered its GDP growth forecast for 2026 to 0.9%, expects unemployment to rise to 5.3%, and sees a weaker labor market, which strengthens the case for further monetary easing.
• The pound remains under pressure, but the path of rate cuts is not set in stone – markets quickly raised the probability of a March rate cut, weighing on GBP, but the following day the pound recouped its losses.

The latest meeting of the Bank of England turned out to be one of the most dovish moments in the current monetary policy cycle and clearly shifted market expectations regarding the central bank’s next steps. Although the key interest rate was kept unchanged at 3.75%, the voting outcome itself and the new macroeconomic projections have led investors to seriously consider the start of another round of rate cuts as early as the next meetings.

One vote away from a cut

The Monetary Policy Committee’s decision was passed by a 5–4 vote, meaning the central bank was just one vote short of an immediate rate cut. All four members of the dovish wing voted in favor of easing, with the decisive vote once again cast by Governor Andrew Bailey. This voting split was widely interpreted as a clear signal that the balance within the MPC is shifting and that maintaining a restrictive policy stance is becoming increasingly difficult to justify.

Inflation falls below target, growth clearly slows

The key argument behind the more accommodative stance lies in the new inflation projections. According to the Bank of England, inflation, currently running at around 3.4%, is expected to fall to about 2% as early as April and then remain at or below the target through 2029. Moreover, for four consecutive quarters inflation is projected to dip below 2%, which in practice means that the risk of a sustained price “overheating” has declined significantly.

At the same time, growth prospects are deteriorating. The GDP growth forecast for 2026 has been revised down to 0.9% from 1.2%, and the labor market is beginning to send increasingly worrying signals. Unemployment is expected to rise to 5.3%, and in 2026–2027 the number of unemployed people is projected to be around 100,000 higher than previously assumed. For the central bank, this implies a growing risk of over-tightening the economy at a time when inflation is already clearly weakening.

Fiscal and regulatory factors reinforce disinflation

The decline in inflation is being driven not only by market forces, but also by administrative and fiscal decisions. The effects of earlier tax and contribution hikes are fading, while government actions—including cuts in regulated energy prices—are set to mechanically reduce inflation by around 0.5 percentage points. An additional argument for a more accommodative policy comes from the Decision Maker Panel survey, which shows that companies are planning the smallest price increases since 2024, suggesting a clear easing of cost pressures across the economy.

Markets react quickly: March in play

Financial markets immediately priced in the central bank’s more dovish message. The probability of a rate cut as early as the March meeting rose to over 50%, and the pound weakened by around 0.9%, falling toward 1.3526 USD. Bailey later acknowledged that he sees this market pricing as a “reasonable benchmark,” further strengthening the conviction that a March cut is a realistic scenario rather than mere speculation. Today, GBP/USD in turn reacted at the support level around 1.3525, with the pound rising by 0.6% against the U.S. dollar.

The “last mile” remains crucial

Despite the clearly dovish turn, not all policymakers share the market’s optimism. The bank’s chief economist, Huw Pill, stresses that monetary policy is indeed moving toward sustainably bringing inflation back to target, but warns against easing too quickly. In his view, part of the disinflation is temporary and driven by factors that may fade, such as lower energy prices or one-off fiscal decisions. Pill also highlights that geopolitical risks and external shocks could have a greater impact on economic stability than the precise pace of future rate cuts.

What’s next for BoE policy and the Pound?

Overall, the Bank of England’s decision was clearly more dovish than many in the market had expected just a few weeks ago. It is increasingly evident that the question is no longer “if” another rate cut will happen, but “when” and at what pace. If labor market data continue to deteriorate and inflation indeed remains below target, the March meeting could mark the beginning of the next phase of monetary easing.

For the pound, this implies a period of heightened volatility. The prospect of faster rate cuts favors downward pressure on GBP, but at the same time any caution from the Bank of England in the months ahead could lead to periodic corrections. Upcoming macroeconomic data releases will therefore be crucial both for MPC decisions and for the future direction of the British currency.