Base Rate steady at 3.75%, but Governor Bailey has "good news"
The Bank of England’s Monetary Policy Committee (MPC) left its policy interest rate unchanged at 3.75% on Thursday, but it was a surprisingly close vote. Five rate setters opted for no change, but four supported a 25 bps reduction. Governor Andrew Bailey began the press conference with the words: “my main message today is one of good news.”
Bank of England forecasters now expect inflation to be “close to” the 2.0% target by April of this year. If correct, this would be a year earlier than the Bank was predicting in November 2025.
The US Federal Reserve, ECB and Bank of Canada also held interest rates steady at their latest policy meetings.
Given the substantial minority on the MPC favouring a cut, the positive messaging from the Governor and the slashing of the inflation forecast, rate setters look set to be more dovish this year than had been previously assumed. Our current forecast is for the Base Rate to see two cuts of 25 bps in 2026, and this news strengthens our confidence in that prediction.
Although headline inflation increased recently – up from 3.2% in November 2025 to 3.4% in December – core inflation (which excludes volatile prices, like petrol) was steady in December and has fallen steadily since July 2025. Also, Governor Bailey said the MPC believes inflation expectations among consumers and firms are set to decline in the months ahead.
Consequently, the MPC is now briefing the financial markets that it is shifting towards a dovish monetary policy in 2026, clearing a path for further interest rate cuts. This will ease pressure on the finances of businesses and households and reduce the cost for the government of servicing the national debt. Lately, measures of UK business activity and confidence have strengthened, such as the composite PMI rising from 51.4 in December to 53.7 in January – a reading of over 50.0 indicates growth for the commercial side of the economy.
Turning to the property market, news that the Bank of England is hinting at upcoming rate cuts should add to the recent improvement in sentiment since the Chancellor’s autumn 2025 budget. Indeed, the latest UK-wide investment sales volume data points to a rebound in Q4 2025, according to RCA, taking the full year figure to £56.1 billion, up 4.4% on 2024. The Q1-Q3 2025 statistics pointed to a year-on-year decline, demonstrating the extent to which activity surged in the final months of 2025.
We view 2026 as a year when more property investors will conclude that real estate is offering good value, underpinned by solid occupier markets, especially for prime stock in core locations. Offices are drawing interest as a recovery play. The prospect of both interest rate cuts and lower inflation in 2026 adds to the case for UK property.
