18th February 2026
Inflation easing boosts expectations of rate cuts but this may need further reductions in inflation before a further cut in interest rates is likely.
January 2026 CPI inflation fell to 3.0%, the lowest in nearly a year, largely due to weaker prices for petrol, food and airfares. This aligns with economist forecasts and the Bank's own projections.
This drop strengthens market expectations that the Bank may cut the base interest rate from its current 3.75%, possibly as soon as the March 2026 meeting. Several financial commentators and economists are saying the softer inflation data increases the likelihood of a rate cut.
What the Bank's policymakers are signalling
At the Bank's February meeting, policymakers held rates at 3.75% but noted inflation is expected to keep falling toward the 2% target. The decision was narrowly split, with some members wanting cuts sooner. This suggests the committee sees scope for cuts but wants more confidence in sustained disinflation.
However, some senior Bank officials have argued for caution on further cuts. They note that underlying inflation — especially in services and wage-driven components — remains above target, meaning policymakers want to be sure the decline is durable before easing further.
Economic backdrop matters
Broader UK data shows weak economic growth and rising unemployment — conditions that typically support looser monetary policy. The cooling labour market and slowing wage growth reduce pressure on prices, giving the Bank some room to consider rate cuts without reviving inflation.
Markets currently price in a decent probability of a quarter-point cut in March, with further reductions later in 2026 if inflation continues to head toward 2%.
Yes the fall in CPI inflation reported by the ONS makes a Bank of England rate cut more likely.
But it’s not guaranteed yet.
Policymakers want evidence that the drop in inflation is persistent and broad-based (not just driven by volatile items like petrol) and that underlying price pressures have eased sufficiently. If inflation keeps trending lower and other indicators (like wage growth and services inflation) cool further, a rate cut — likely in March 2026 — becomes more probable.
Key risks that could delay cuts
Ongoing above-target services inflation, stubborn wage pressures, or upside surprises in future price data.
The Bank of England next announcement on interest rates is scheduled for 19th March 2026.