The Bank of England’s decision to keep rates at 3.75% could lead to a rate cut in March, according to ING. The Monetary Policy Report indicates that wage growth is nearing the targeted inflation rate, prompting expectations for further rate reductions in June, potentially lowering rates to 3.25%.
The decision raises anticipation for a rate cut next month, contingent on trends like weaker employment, lower wage growth, and easing inflation. Headlines suggest inflation could drop to 1.8% by April, maintaining around 2% during the spring and summer, which is slightly below the Bank’s forecasts.
Market Projections
Market analysts anticipate the Pound may trade up to 0.88 in coming months due to softer UK yields and local political factors. Political uncertainty is expected to play a major role, with a predicted EUR/GBP forecast of 0.90 by year-end, as euro strength aligns with a projected European growth rebound.
The article was created using an AI tool and reviewed for accuracy. The FXStreet Insights Team consists of journalists who outline market insights from expert observations, supplemented by additional analysis from a variety of sources.
As we anticipated throughout 2025, the Bank of England’s dovish pivot led to the rate cuts we saw in March and later in the summer. This brought the Bank Rate down to its current 3.25%. Now, looking ahead, the market is pricing in further easing, with overnight index swaps suggesting a greater than 70% probability of another cut by May.
This expectation for lower rates is being driven by slowing economic activity. The latest PMI data from January 2026 showed the services sector barely expanding, a significant cooling from the trend seen in mid-2025. This weakness reinforces the view that the Bank will need to stimulate the economy sooner rather than later.
Inflation Concerns
However, inflation has proven stickier than we forecast last year, with the January 2026 CPI figure coming in at 2.4%, stubbornly above the Bank’s 2% target. More importantly, wage growth, while lower than its 2025 peaks, is still elevated at 4.8%. This presents a risk that the widely expected rate cuts could be delayed if this wage pressure persists.
This divergence puts sterling in a vulnerable position. Our call last year for EUR/GBP to rise towards 0.90 was largely realized as the pair ended 2025 near 0.8950. As of today, it continues to trade firmly around the 0.8900 level, reflecting the market’s bearish outlook on UK rates compared to the ECB’s stance.
For derivative traders, this creates an environment where sterling volatility is likely to increase. The conflict between slowing growth and persistent inflation means the Bank’s upcoming decisions are highly uncertain. We believe buying EUR/GBP call options is a prudent strategy to position for further pound weakness while capping downside risk if the Bank surprises with a hawkish hold.
