The Bank of England’s path to rate cuts has effectively been closed for the first half of 2026, after the Monetary Policy Committee held its bank rate at 3.75 per cent on 30 April by a vote of 8 to 1, having already held at the same level on 19 March. With the next rate decision scheduled for 18 June, markets have stripped out the rate-cut bets that had been priced in at the start of the year, and major institutional forecasters have followed suit. Vanguard‘s UK macroeconomic team wrote in April that they had “revised our policy outlook and now expect the Bank of England to maintain its bank rate at 3.75% rather than make two cuts in 2026.”
The numbers behind the hold: CPI 3.3%, services 4.5%, food 3.7%
The MPC’s caution is rooted in inflation that simply will not fall as fast as the Bank’s own February forecast had projected. CPI inflation hit 3.3 per cent in March 2026, up from 3.0 per cent in February — moving in the wrong direction relative to the 2 per cent target. CPIH rose 3.4 per cent over the same period. Core inflation, which excludes volatile food and energy components, slipped marginally to 3.1 per cent in March from 3.2 per cent in February — but remains a full percentage point above the level consistent with the inflation target. The two stickiest components are services inflation at 4.5 per cent (up from 4.3 per cent in February) and food inflation at 3.7 per cent (up from 3.3 per cent in February).
Why services inflation matters so much
Services inflation is the single most important indicator the MPC monitors when setting interest rates, because services prices are “less exposed to global factors and more dependent on domestic costs,” as the House of Commons Library research note puts it. The 4.5 per cent reading is the highest in five months, and reflects the combination of public-sector pay rises implemented earlier in 2026 than in 2025, energy passthrough into hospitality and retail, and persistent wage growth. Public-sector regular pay growth was 7.9 per cent in the three months to November, the Bank’s February Monetary Policy Report noted, and the risk of spillover into private-sector pay remains live.
The Bank’s own forecast: ‘between 3% and 3.5%’ through Q3
The Bank’s most recent communication, in the Monetary Policy Summary of 19 March 2026, said: “Based on preliminary estimates, CPI is now likely to be between 3% and 3.5% in second and third quarters of 2026, due to higher energy prices.” That is a meaningful upward revision from the February Monetary Policy Report, which had projected 0.2 per cent underlying GDP growth in Q1 2026 and a CPI path returning toward 2 per cent through 2026. The intervening event was the Israel/US-Iran war, which began on 28 February 2026, disrupting Middle Eastern oil and gas flows. Spot oil prices in the 15 UK working days to 26 January had averaged around $66 a barrel; current pricing is well above that level.
The Q1 GDP cliffhanger: 14 May release
Markets are now focused on 14 May 2026, when the Office for National Statistics publishes Q1 2026 GDP. UK real GDP grew by 0.5 per cent in the rolling three months to February, ONS confirmed in its most recent release, with services up 0.5 per cent and production up 1.2 per cent. But the production gain followed an even larger 1.7 per cent increase in the three months to January. The Treasury’s April 2026 survey of independent forecasts showed an average 2026 GDP growth forecast of just 0.6 per cent, down from 0.9 per cent before the Iran war. Barclays and KPMG are at 0.7 per cent; Oxford Economics at 0.4 per cent; Pantheon Macroeconomics at 0.6 per cent.
The IMF and OECD downgrades: ‘sharpest of any G7’
Both the IMF and OECD have cut their 2026 UK growth forecasts by 0.5 percentage points since the war began — the largest downgrades of any G7 economy. The Resolution Foundation noted in its Q2 macro outlook: “Although UK GDP is about half as energy intensive as the global average, two features set Britain apart from its peers. First, British households are unusually exposed to gas prices. Gas accounts for 62 per cent of final household energy consumption — by far the highest share in the G7 — and our electricity prices are closely tied to wholesale gas. Second, UK interest rates are particularly exposed.” UK 10-year gilt yields have risen by more than any G7 country bar Italy since the conflict began.
What 18 June will and won’t deliver
Expectations for the 18 June MPC meeting are tightly grouped around a hold. Vanguard projects the bank rate ends 2026 at 3.75 per cent, having stripped out two cuts. Resolution Foundation warns that any major fiscal response to the inflation shock would be “extremely costly” — offsetting the 1.5 percentage-point increase in the Bank’s inflation outlook for Q3 would cost about £20 billion if continued for a year. The political pressure for cuts will rise sharply if the labour market deteriorates further over the summer, but the MPC has been explicit that it is prioritising second-round inflationary effects over growth concerns. For mortgage borrowers, businesses borrowing at the margin, and the property market, the message is clear: 3.75 per cent is the floor for the foreseeable future.
This analysis draws on Bank of England Monetary Policy Summary (30 April 2026), the February 2026 Monetary Policy Report, ONS inflation and GDP data through March 2026, Vanguard’s UK economic outlook (April 2026), and the Treasury’s April 2026 survey of independent forecasts.
