The Bank of England decided to keep interest rates at 3.75%, but ING suggests there might be a rate cut in March. The Monetary Policy Report shows that wage growth is getting close to the inflation target, leading many to expect further cuts in June, possibly bringing rates down to 3.25%.
This decision raises hopes for a rate cut next month, depending on factors like weaker employment, lower wage growth, and easing inflation. Some reports say inflation could fall to 1.8% by April and stay around 2% during spring and summer, slightly below what the Bank predicted.
Market Projections
Market analysts think the Pound may rise to 0.88 in the coming months due to weaker UK yields and local political issues. Political instability is expected to have a significant impact, with forecasts suggesting an EUR/GBP rate of 0.90 by the end of the year, as a stronger euro aligns with anticipated growth in Europe.
This article was created using AI and reviewed for accuracy. The FXStreet Insights Team, made up of journalists, offers market insights based on expert observations and analysis from various sources.
As we expected in 2025, the Bank of England’s shift towards lower rates led to the cuts we saw in March and later in the summer. This brought the Bank Rate down to 3.25%. Now, the market predicts further cuts, with overnight index swaps indicating over a 70% chance of another cut by May.
This expectation for lower rates is fueled by slowing economic activity. The latest PMI data from January 2026 shows that the services sector is barely growing, a sharp decline from mid-2025. This slowdown indicates that the Bank may need to stimulate the economy sooner rather than later.
Inflation Concerns
However, inflation is remaining higher than we predicted last year, with the January 2026 CPI at 2.4%, still above the Bank’s 2% target. Wage growth, while lower than in 2025, is still high at 4.8%. This could delay the expected rate cuts if wage pressures continue.
This situation puts the pound at risk. Our prediction last year for EUR/GBP to rise towards 0.90 was realized, as it ended 2025 near 0.8950. Currently, it is trading around 0.8900, reflecting a negative market outlook on UK rates compared to the ECB.
For traders in derivatives, this creates a scenario of likely sterling volatility. The tension between slowing growth and persistent inflation means the Bank’s upcoming decisions are quite uncertain. We recommend buying EUR/GBP call options as a wise strategy to prepare for further pound weakness while limiting potential risks if the Bank decides to hold rates steady.
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