Bank of England Keeps Rates Steady at 3.75% as Policy Transmission Continues

The Bank of England has held interest rates unchanged at 3.75%, allowing time for previous rate cuts to fully transmit through the economy. The lag between policy changes and their economic impact is influencing the committee’s decision-making.
The monetary policy committee’s 5-4 vote to maintain rates partly reflected recognition that the six previous cuts since mid-2024 are still working their way through the economy. Four members believed enough time has passed to justify another cut, while five preferred to wait for clearer evidence of how previous easing is affecting economic activity.
Monetary policy operates with long and variable lags, meaning that rate cuts implemented months ago are still influencing borrowing costs, investment decisions, and consumer spending. The full impact of cuts made in mid-to-late 2024 may not be visible in economic data until spring 2026 or later.
Governor Andrew Bailey’s comments acknowledged this transmission mechanism. While projecting that inflation would fall to around 2% by spring, he suggested this partly reflects the impact of previous easing working through the economy. The decision to hold now allows time to assess whether these previous cuts are having the desired effect without overshooting.
The challenge of timing policy when effects lag is evident in the forecasts. GDP growth is projected at just 0.9% this year despite six previous cuts, raising questions about whether policy is still too restrictive or whether the cuts haven’t yet fully transmitted. Unemployment is expected to reach 5.3%, suggesting labor market weakness despite easing. Chancellor Rachel Reeves’s budget measures, including utility bill cuts and rail fare freezes from April, add another layer of policy transmission to consider, with effects expected to drive inflation to 2.1% by mid-2026.