Bailey applies the brakes but ‘two more 2026 cuts priced in’
- Vote to hold rates ‘closer than expected’ as Bank of England eyes April for 2% inflation target
- Focus turns to US and Japan in impact they play on shape of global investment flows says Rathbones’ Head of Market Analysis
- Kirsten Pettigrew, Senior Financial Planner, warns of making financial decisions based on speculation around rate trajectories
Responding, John Wyn-Evans, Head of Market Analysis at Rathbones, one of the UK’s leading wealth and asset management groups, said: “Following several meetings at which Governor Andrew Bailey had been called on to cast the decisive vote, forecasts were for a much greater consensus to leave the base rate unchanged at today’s meeting. There is some evidence that the economy has shaken off the worst of its pre-Budget fears for now, at least, although the political temperature will rise again as we approach May’s local government elections. Stronger growth also means that inflation might be slower to return to target, another reason to hold off on a rate cut for now.
“In the event, the vote turned out to be much closer than expected, 5-4 in favour of no change, with Governor Bailey left to apply the brakes once more. The statement cited that inflation risks are ‘less pronounced’ and that rates are ‘likely to be reduced further’, although the latter claim was already very much priced into interest rate futures and swap rates – it’s always been a question of ‘when’ not ‘if’, and then by how much.
“In its outlook, the Bank of England sees inflation reaching its 2% target as soon as April thanks to energy price-cutting initiatives announced in the last Budget and the effect of big price increases a year earlier falling out of the annual calculation. It also reduced its 2026 inflation forecast from 2.8% to 2.1%. But those voting for no change still want to see more evidence. However, at least some of the lower inflation is down to weaker growth, with the current year GDP forecast reduced from 1.2% to 0.9% and 2027’s from 1.6% to 1.5%, with 2028 now pegged at 1.9% vs 1.8% previously.
“The immediate, and understandable, market reaction was to bring forward the timing of the next quarter-point rate cut from July to April. The market now prices the year-end rate at 3.26% as opposed to 3.37% ahead of the meeting. That’s pretty much two more cuts priced in now. There was limited reaction in longer end of the Gilts market, with 10-year yields just 2 basis points lower at 4.53%, but outperforming other markets today.
“The pound reacted by weakening around half a precent against other currencies as the prop of expected higher-for-longer rates was removed, but this should be seen as a natural response to a shift in interest rate differentials rather than a vote on the underlying state of the economy or government.
“Despite today’s surprise, other central banks will have a bigger role to play in directing global investment flows. With Kevin Warsh having sealed the President’s nomination to succeed Jerome Powell in May, all eyes will be on the outcome of his first FOMC meeting in June (should he be confirmed). Although his past pronouncements have tended to be ‘hawkish’, we doubt that Trump would have nominated anyone intent on tightening monetary policy.
“Then we have Japan. The Bank of Japan is steadily tightening policy as the country returns to growth with a splash of inflation. For now, this can be considered as normalisation after years of excessively loose policy. Next steps could well depend on the outcome of next weekend’s snap general election that could hand the LDP’s current Prime Minister, Sanae Takaichi a mandate to loosen fiscal policy more aggressively. If that is deemed to be too inflationary, we could see interest rates and bond yields rising further, potentially sucking liquidity back to Japan.”
Kirsten Pettigrew, Senior Financial Planner, said:
“Every pound earned, spent or saved in the UK is influenced in some way by the Bank of England’s interest rate decisions. A hold has a domino effect across almost all forms of borrowing. For variable‑rate mortgage holders, it simply means no change, as their payments are directly linked to movements in the base rate – or the lack of movement in this case.
“While a hold keeps variable‑rate mortgage costs steady, the wider mortgage market is shaped by much more than the base rate alone. Market swap rates, government bond yields, lender competition and borrower‑specific risk factors all play a crucial role in determining what borrowers ultimately pay.
“For savers, a pause provides some breathing room. Savings rates have been slipping since the rate‑cut cycle began, so a hold helps slow the decline – but with further cuts expected this year, the best deals may not be around for long.
“Although the mood music suggests interest rates are on a downward trajectory, uncertainty remains over how fast and how far cuts will go. Making financial decisions on the assumption that change is imminent can lead to frustration. Ultimately, resilience comes from preparation, not prediction. Staying on top of your money and making the necessary tweaks to maintain financial strength remains essential – whatever the economic climate.”
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