BoE and ECB rate decisions: both on hold, for now

Bank of England: Still very split; still on track to cut

The Bank of England’s Monetary Policy Committee (MPC) was widely expected to leave rates on hold (at 3.75%), having cut rates only in December.

Thursday’s (5 February 2026) on hold decision was no surprise. The central bank has been cutting rates gradually and with what has felt like increasing reluctance. But the ‘on hold’ decision came with some dovish messaging.

First, the vote was split 5-4, rather than being more decisive, with four wanting to cut rates again already. Governor Andrew Bailey remained the swing voter.

Second, core messaging was broadly unchanged from the December meeting and still points towards rate cuts: “On the basis of the current evidence, Bank Rate was likely to be reduced further, although there were different views on the timing and extent. Judgements around further policy easing would become a closer call”. In this case, “slowing the pace of further easing could provide space to gain assurance about how the risks were evolving”.  The bank has been cutting at a roughly once a quarter pace, so slowing the pace could be consistent (for example) with an April rate cut.

Third, more evidence of disinflation will likely required before cutting again and that evidence is ongoing: "Reflecting the impact of monetary policy, and consistent with evidence of subdued economic growth and building slack in the labour market, pay growth and services price inflation have generally continued to ease. The risk from greater inflation persistence has continued to become less pronounced...” Inflation is also expected by the BoE to fall back to around 2% in April (from 3.4% currently) and its central forecast now has inflation a bit below 2% for much of 2027 and in the first part of 2028. However, the bank is very focused on what is happening to underlying inflation where it sees that as determining how sustainably the 2% target will be hit. Members have different views on how much the expected fall in inflation this year will help it remain around 2%. Some think that lower inflation could quickly feed through into inflation expectations and future wage indicators. Others are less convinced.

Fourth, there was also a somewhat downbeat take on the outlook. From the minutes, for example: “Agents’ intelligence pointed to a subdued outlook for demand. The labour market had continued to loosen”.  The Bank’s central GDP forecast was also revised down for the next year or so.

UK inflation is likely to fall this year, and the labour market remains soft. I still expect the BoE to cut rates again this year. But we may have to wait a bit.

Looking at the Governor’s views as the swing voter: “Overall, the risks from inflation persistence appear to have continued to reduce. I therefore see scope for some further easing of policy”. He said, however, that didn’t mean he expected to cut at any particular meeting. His central outlook is aligned with the staff’s – for weak demand – but he sees the supply story as uncertain and sounds unsure how much the expected drop in inflation will feed through into wage settlements. He said in the press conference that he wanted to see more evidence that the bank is on a sustainably lower path for inflation. He did, however, point out that some evidence could come as soon as the next inflation release.

UK inflation is likely to fall this year, and the labour market remains soft. I still expect the BoE to cut rates again this year (I have two cuts in my central forecast for 2026), and I read today’s decision and material as consistent with that. But we may have to wait a bit.

European Central Bank: On hold, no surprises

As expected, the European Central Bank (ECB) kept policy unchanged with the deposit rate at 2% (where it has been since the middle of last year). The governing council’s decision was again unanimous.

The ECB’s core messaging was unchanged too: It will follow a data-dependent, meeting-by-meeting approach and are not pre-committing to a particular path. President Christine Lagarde said that the bank was still “in a good place” (when prompted).

This was a balanced sounding decision/press-conference (rather than particularly hawkish or dovish) in my view. President Lagarde, in relation to the bank’s risk assessment, said that they are in a broadly balanced situation but that they are not seeing a reduction of the range of risks.

She downplayed the recent drop in inflation below target, saying that they cannot be hostage to one reading of inflation. She said that there were multiple causes of the 1.7% latest reading, some of which were idiosyncratic. She pointed out that the bank sees inflation at 2% in the medium-term. She also said that she was particularly attentive to services inflation which is declining a bit and also said that their wage tracker seems to suggest wage growth moderation but said that there is nothing that is really changing the baseline.  Core inflation, she said, is following the path they had anticipated.

My central case is for the ECB to keep rates on hold this year, but at the moment I still see more chance of a rate cut than a rate hike given current inflation dynamics.

Lagarde wouldn’t be drawn on the exchange rate but said that they recognise that it is important for the growth and inflation outlook, and, for that reason, they always keep an eye on it (she also said that the current range for euro / US dollar is very much in line with the overall average). 

My central case is for the ECB to keep rates on hold this year, but at the moment I still see more chance of a rate cut than a rate hike given current inflation dynamics.  

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