The Bank of England hinted at a rate cut in March, but cautioned about service sector inflation.
2026-02-25 13:10:34
The Bank of England could quietly cut interest rates again in March, but caution is advised, according to the conclusion reached by the Bank of England governor before a parliamentary select committee on the Treasury.
Governor Bailey is discussing with lawmakers the bank’s decision earlier this month to keep interest rates at 3.75%, while also hinting at what might happen next.
He told the committee he would "ask whether a rate cut is appropriate" at the upcoming meeting. Bailey stated that inflation is returning to the target level, meaning there is room for further monetary policy easing. The market believes there is nearly a 90% chance of a rate cut in March.
Sarah Ying, an analyst at CIBC Capital Markets, said, "In addition to political uncertainty, the market expects another rate cut in March, and we remain bearish on the pound."
But there is another warning: Bailey said that service price inflation has not eased as banks believed.
This supports the view that although inflation will decline further, it will trend above the target level during the forecast period, which will limit the scope for further interest rate cuts.
Nikesh Sawjani, senior UK economist at Lloyds Bank, said the problem facing the Bank of England’s dovish stance is that both core and service inflation have only fallen slightly by 0.1 percentage points, down to 3.1% and 4.4% respectively in January.
This means they are actually 0.2 and 0.3 percentage points higher than the Bank of England's forecast.
Sawjani stated, "While we still expect overall inflation to fall to around 2% in April, the stickiness of fundamental indicators may persist for some time ."
Governor Bailey is discussing with lawmakers the bank’s decision earlier this month to keep interest rates at 3.75%, while also hinting at what might happen next.
He told the committee he would "ask whether a rate cut is appropriate" at the upcoming meeting. Bailey stated that inflation is returning to the target level, meaning there is room for further monetary policy easing. The market believes there is nearly a 90% chance of a rate cut in March.
Sarah Ying, an analyst at CIBC Capital Markets, said, "In addition to political uncertainty, the market expects another rate cut in March, and we remain bearish on the pound."
But there is another warning: Bailey said that service price inflation has not eased as banks believed.
This supports the view that although inflation will decline further, it will trend above the target level during the forecast period, which will limit the scope for further interest rate cuts.
Nikesh Sawjani, senior UK economist at Lloyds Bank, said the problem facing the Bank of England’s dovish stance is that both core and service inflation have only fallen slightly by 0.1 percentage points, down to 3.1% and 4.4% respectively in January.
This means they are actually 0.2 and 0.3 percentage points higher than the Bank of England's forecast.
Sawjani stated, "While we still expect overall inflation to fall to around 2% in April, the stickiness of fundamental indicators may persist for some time ."
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