Bank of England Maintains 3.75% Rate as Inflation Gap Narrows Toward Target

The Bank of England has kept interest rates unchanged at 3.75% as the gap between actual inflation and the 2% target continues to narrow. This convergence is shaping expectations for the future path of monetary policy.
The monetary policy committee’s 5-4 vote reflected debate about whether the narrowing inflation gap already justifies lower rates. Four members believed that with inflation approaching the target, restrictive policy settings are no longer necessary. Five members preferred to wait for confirmation that inflation will actually settle at 2% sustainably.
Current inflation of 3.4% represents a significant decline from the peaks experienced in recent years, but still remains 1.4 percentage points above the target. The Bank projects this gap will close entirely by spring, when inflation is expected to return to around 2%. By the second quarter of 2026, inflation is forecast at 2.1%, essentially at target.
Governor Andrew Bailey emphasized the importance of this convergence, noting that as inflation moves closer to 2%, judgments about further rate cuts become “a closer call.” This language suggests policymakers are becoming more cautious as they approach what they view as an appropriate policy stance for an economy at-target inflation.
The narrowing gap is partly due to Chancellor Rachel Reeves’s budget measures, including utility bill cuts and rail fare freezes from April, which are expected to significantly reduce price pressures. Economic growth is forecast at just 0.9% this year with unemployment reaching 5.3%. As the inflation gap closes, the case for maintaining restrictive interest rates weakens, though policymakers remain divided on whether to act immediately or wait for further confirmation.