Monetary Policy Report (2026-02)

Monetary Policy Report - February 2026 Our quarterly report sets out the economic analysis and inflation projections that the Monetary Policy Committee uses to make its interest rate decisions. Related links Related links Monetary Policy Summary and minutes of the Monetary Policy Committee meeting Our latest decision explained Agents summary of business conditions - February 2026 Published on 05 February 2026 Downloads Press conference Monetary Policy Report - February 2026 (PDF 3.8MB) PDF Close dialog Monetary Policy SummaryAt its meeting ending on 4 February 2026, the Monetary Policy Committee voted by a majority of 5–4 to maintain Bank Rate at 3.75%. Four members voted to reduce Bank Rate by 0.25 percentage points, to 3.5%.Although above the 2% target currently, CPI inflation is expected to fall back to around the target from April, owing to developments in energy prices including from Budget 2025. Reflecting the impact of monetary policy, and consistent with evidence of subdued economic growth and building slack in the labour market, pay growth and services price inflation have generally continued to ease. The risk from greater inflation persistence has continued to become less pronounced, while some risks to inflation from weaker demand and a loosening labour market remain.Monetary policy is being set to ensure that CPI inflation not only reaches 2% but remains sustainably at that level in the medium term, which involves balancing the risks around achieving this. The restrictiveness of policy has fallen as Bank Rate has been reduced by 150 basis points since August 2024. On the basis of the current evidence, Bank Rate is likely to be reduced further. Judgements around further policy easing will become a closer call. The extent and timing of further easing in monetary policy will depend on the evolution of the outlook for inflation. Monetary Policy OverviewThe Monetary Policy Committee’s (MPC’s) job is to ensure that inflation continues to fall back to the 2% target and then stays there. Monetary policy has already helped to bring inflation back towards the target over the past three years. That has allowed the MPC to make monetary policy less restrictive by cutting Bank Rate six times since August 2024. CPI inflation was 3.4% in December. Wage and price pressures have continued to moderate but remain above rates consistent with meeting the inflation target in the medium term. Recent developments provide more confidence that inflation is on track to return close to the 2% target soon but the MPC needs to ensure that it stays at the target. The MPC’s policy decisions continue to be shaped by how two big forces play out. On the one hand, the period of high inflation could have affected the way wages and prices are determined in the economy, creating more persistent inflationary pressure. On the other hand, weaker labour demand and subdued household spending could take inflation below the target. Monetary policy is being set to balance these risks so that Bank Rate is neither too low nor too high. The current approach to setting interest rates, including today’s decision, is based on two key judgements. Key policy judgement 1The risk from greater inflation persistence has continued to become less pronounced, while some risks to inflation from weaker demand and a loosening labour market remain.The recent experience of high inflation could still be affecting wages and prices. This could create more persistent inflationary pressure, requiring tighter monetary policy than otherwise. Services price inflation and wage growth still need to fall further for the MPC to be confident that inflation will return to the target and stay there (Box A: Estimates of ‘target-consistent’ wage growth). In addition, weak productivity growth could put upward pressure on companies’ costs (Box C: The outlook for productivity growth). However, other developments and new analysis suggest that the risk of greater inflation persistence has continued to diminish. The outlook for inflation over the next six months is notably lower than expected in November. That mainly reflects developments in energy prices, including the impact of measures announced in Budget 2025 (Box D: Budget 2025 and the impact of fiscal policy on the economy). Lower inflation in coming months should feed through into lower inflation expectations among households and businesses, reducing the risk that high inflation becomes self-fulfilling (Box B of the November 2025 Monetary Policy Report). And, while wage growth may only be falling slowly, new evidence provides reassurance that structural changes in wage-setting will not keep adding to inflationary pressures (Box B: Heterogeneity in wage-setting behaviour among UK firms). While concerns about the upside risk from greater inflation persistence continue to become less pronounced, some risks to the outlook for inflation from weaker demand and a loosening labour market remain. This could lead to a substantial margin of spare capacity, causing inflation to settle below the 2% target unless monetary policy were loosened further. Despite past reductions in Bank Rate, the household saving rate remains above historical levels. That could indicate that households are more cautious following the recent shocks to their finances, and that spending growth will remain weak (Box D of the November 2025 Monetary Policy Report). Labour market conditions have loosened (Section 1.2) and any further weakening in labour demand could lead to a more pronounced rise in unemployment (Box E of the November 2025 Monetary Policy Report). Key policy judgement 2On the basis of the current evidence, Bank Rate is likely to be reduced further. Judgements around further policy easing will become a closer call.Monetary policy is being set to ensure that inflation not only reaches the 2% target but remains sustainably at the target in the medium term. Monetary policy continues to weigh on inflation and activity (Box E: Monitoring the transmission of monetary policy with interest rate-sensitive indicators). If inflationary pressures continue to ease, Bank Rate is likely to be reduced further. Judgements around further reductions will become a closer call.As always, the extent and timing of further easing in monetary policy will depend on the evolution of the outlook for inflation. On the one hand, cutting Bank Rate too quickly or by too much could lead to inflationary pressures persisting, requiring policy to change course. On the other hand, waiting too long to ease policy could come at the cost of a sharper downturn in activity, and subsequently inflation, requiring greater policy easing later on to ensure inflation returns sustainably to the target. With uncertainty around how precisely a neutral level of Bank Rate can be estimated, slowing the pace of further easing could provide space to gain assurance about how the risks are evolving.The central projection described in Section 3.1 provides a reasonable baseline for how the majority of the MPC judges the economy is likely to evolve if neither of the remaining risks around inflation persistence and demand weakness materialise to a meaningful degree. Section 3.2 sets out how the economy could evolve differently to the central projection, including by updating the scenarios from the November Report. These scenarios also help the MPC to consider how well different monetary policy responses might perform in achieving the MPC’s objective of low and stable inflation at the 2% target. At this meeting, the MPC voted to maintain Bank Rate at 3.75%. More evidence is needed on how the risks to the medium-term outlook are evolving before cutting Bank Rate further. 1: Current economic conditions1.1: InflationHeadline CPI inflation was 3.4% in December, slightly lower than expected at the time of the November Report.CPI inflation has fallen by 0.4 percentage points from its recent peak in September (Chart 1.1) and was 0.1 percentage points below expectations at the time of the November Report. The downside news relative to November largely reflects lower food and services price inflation. Despite the recent slowing, inflation remains above the 2% target. That in part reflects unusually large increases in administered prices such as Vehicle Excise Duty and higher water bills. These are currently estimated to be contributing around 0.5 percentage points to the inflation overshoot, based on the difference between their current and historical contributions (Chart 1.3). Food, beverage and tobacco inflation is estimated to be contributing a further 0.5 percentage points to the inflation overshoot. Elevated labour cost growth is also pushing up inflation, particularly for services which tend to be labour intensive. Chart 1.1: CPI inflation was 3.4% in December Contributions to CPI inflation (a)FootnotesSources: Bloomberg Finance L.P., Department for Energy Security and Net Zero (DESNZ), ONS and Bank calculations.(a) Figures in parentheses are CPI basket weights in 2025, which do not sum to 100% due to rounding. Data are shown to December 2025. Component-level Bank staff projections are shown from January 2026 to June 2026. The projection also accounts for expected changes in CPI weights in 2026. The food component is defined as food and non-alcoholic beverages. Fuels and lubricants estimates use DESNZ petrol price data for January 2026 and are then projected based on the sterling oil futures curve.Headline CPI inflation is projected to slow much more than expected in the November Report, to 2.1% in 2026 Q2, largely reflecting measures announced in Budget 2025.CPI inflation is expected to fall to 2.1% in 2026 Q2, a 0.7 percentage point greater fall than anticipated in the November Report (Chart 1.2). That news largely reflects the energy bills package announced in Budget 2025 (Box D), which, alongside a fall in wholesale gas prices, is expected to result in a decline in the Ofgem price cap in April to £1,616 from £1,758. That fall in the contribution of utility prices represents around one third of the overall expected decline in CPI inflation in the first six months of 2026 (Chart 1.1).Chart 1.2: Lower household energy prices mean that CPI inflation is projected to slow much more than expected in the November ReportNews to CPI inflation relative to the November 2025 projection (a)FootnotesSources: ONS and Bank calculations.(a) Bank staff’s short-term inflation forecast only extends for six months. For that reason the Q2 ‘Non-energy’ bar represents the difference between the February Report short-term forecast shown in Chart 1.1 and the November Report medium-term central projection, excluding the effects of energy. The ‘Energy due to Budget’ bars represent the estimated impact of the energy bills package and the extension of the fuel duty cut. The ‘Non-Budget energy’ bar represents expected falls in utility price inflation due to non-Budget related factors such as falls in wholesale gas prices.A reduction in the contribution from other changes in administered prices, regulated prices and indirect taxes (AR&T) is also expected to support the near-term disinflation process. Bank staff judge that the overall contribution of AR&T will fall to around its historical average in 2026 Q4 (Chart 1.3).Chart 1.3: The estimated contribution of AR&T to CPI inflation is expected to be around its historical average by 2026 Q4Estimated contributions of AR&T to CPI inflation (excluding major VAT changes) (a)FootnotesSources: ONS and Bank calculations.(a) These data exclude major VAT changes in 2008–11 and 2020–22, the Eat Out to Help Out scheme and the Energy Price Guarantee effective 2022–24. The diamond includes the impact of the energy bills package announced in Budget 2025 which is worth a little over 0.2 percentage points. Around 12% of the basket is estimated to be associated with AR&T changes. Given the variability of the contribution of AR&T over the past, the long-term average might not be a good guide to future trends. The latest data are for December 2025 and the diamond is for 2026 Q4.A broad-based slowing in other components is expected to account for the remaining fall in CPI inflation over 2026 H1. That in part reflects the continued slowing in wage growth and a fading impulse from the 2025 increase in employer NICs. Continued falls in some indicators of external costs are also expected to support disinflation in the near term. Bank staff project that core goods inflation will fall to 0.9% by June 2026, slightly above its 2012–19 average. Services and food price inflation are expected to moderate to 3.3% and 2.4% respectively, close to, but still slightly above, their 2012–19 averages.Global price pressures remain subdued.Indicators of global price pressures have been weak, reflecting falling energy prices, domestic demand weakness in China and the effects of higher US tariffs. Chinese export prices fell by over 2% in the year to 2025 Q3, which may be partly due to trade diversion, as well as continuing demand weakness in China. This, alongside weakness in euro-area export prices and the US dollar, has meant that aggregate UK import prices have been fairly flat over 2025 and import price inflation is expected to remain subdued. Spot oil prices were around $66 a barrel in the 15 UK working days to 26 January, a little higher than in the period leading up to the November Report. The UK gas futures curve has fallen by around 13% on average over the same period. Indicators of food price inflation have eased. Agricultural commodity prices for items such as cocoa and cattle had surged in 2025 (Box E of the August 2025 Monetary Policy Report), pushing up consumer prices, but these have since fallen from their recent peaks. Further down the supply chain, producer output prices have been flat since August. Contacts of the Bank’s Agents report that food price inflation has peaked and should moderate further from here (Agents’ summary of business conditions – February 2026 (ASBC)).Wage growth has continued to moderate.Annual private sector regular AWE growth slowed to 3.6% in the three months to November, down from 4.4% in the three months to August and 0.1 percentage points below the projection in the November Report. That fall was partly due to mechanical base effects, as strong monthly growth rates from last year dropped out of the annual comparison, but timelier measures of pay growth have also cooled. Bank staff estimates that abstract from volatile movements in AWE indicate a three-month annualised growth rate of around 3¼%. Alternative indicators generally also suggest continuing moderation, though to differing degrees. An estimate of private sector median pay based on HMRC RTI data implies pay growth of 4.6% in December 2025, down from 5.0% in September 2025.The recent slowing in wage growth has brought it closer into line with the rate implied by its key determinants, following a period of unexplained strength. A model estimated on pre-Covid pandemic data suggests that the estimated rate of wage growth in 2025 Q4 can be largely explained by movements in inflation expectations, productivity and the margin of slack in the economy (Chart 1.4). Box B discusses reasons for the recent excess strength in wage growth shown in the gold bars and implications for the wage outlook. Chart 1.4: Wage growth is broadly as expected based on a simple model of its key determinants Contributions to estimated annual private sector regular pay growth (a)FootnotesSources: Barclays, Citi/YouGov, ONS and Bank calculations.(a) Wage equation based on Yellen (2017). Short-term inflation expectations are based on the Barclays Basix Index and the YouGov/Citigroup one-year ahead measure of household inflation expectations. Slack is based on the MPC’s estimate of the unemployment gap. Productivity growth is based on market sector productivity growth per head. Values may not sum due to rounding. The unexplained component is the residual. The final data point is 2025 Q3 and the estimate for 2025 Q4 is a staff projection.In contrast to the slowing in the private sector, public sector regular pay growth rose to 7.9% in the three months to November. That in part reflects some public sector pay rises being implemented earlier in 2025 than in 2024. The risk that high public sector pay growth spills over to the private sector is likely to be low, in part because job flows between the two sectors are currently below their pre-pandemic averages.Some further easing in wage growth is expected in 2026 as labour market conditions continue to loosen.The Agents’ pay survey suggests that basic private sector pay settlements will average 3.4% over 2026, broadly in line with expectations at the time of the November Report, and down from an average actual pay settlement of 4.0% in 2025 (ASBC – February 2026). The distribution of expected pay settlements has shifted lower, with over 70% of settlements now in the 2%–4% range (Chart 1.5). Firms reported that current and expected inflation were among the most important factors pushing up pay settlements.footnote [1] Chart 1.5: The distribution of expected pay settlements in the Agents’ pay survey has shifted leftFitted kernel density and median survey expectations (a)FootnotesSources: Bank of England Agents and Bank calculations.(a) Kernel density estimates of the distribution of one year ahead expected pay settlements from the Agents’ pay survey. Curves are smoothed representations of the underlying survey responses. Each line shows the distribution of responses for the year indicated. Dashed lines represent the median survey expectations for each year. The latest data are the 2026 expected pay settlements. Other forward-looking indicators of pay growth are also consistent with some further easing. Firms responding to the DMP Survey, for example, expect wage growth to fall by 0.7 percentage points to 3.7% by 2026 Q4, and then a little further in the three months to January 2027. A smaller increase in the NLW should help to support the disinflation process. The forthcoming increase in April 2026, of 4.1%, is expected to have a negligible impact on aggregate wage growth, in contrast to the 0.2 percentage points boost to wage growth estimated in 2025, when the NLW was increased by 6.7%. Contacts of the Bank’s Agents report that lower pressure from the NLW is expected to reduce labour cost growth this year.Bank staff’s central projection is for a further slowing in AWE growth, to 3.2% by 2026 Q2 (Chart 1.6). The projection is informed by the 3.4% estimate for basic settlements from the Agents’ pay survey, as well as an expectation that pay drift will weigh on AWE pay growth. Pay drift reflects the extent to which aggregate pay growth diverges from pay settlements and can be positive when firms are under pressure to raise pay to retain or attract workers. As the labour market has loosened (Section 1.2), pay drift has turned slightly negative. Firms’ average wage expectations in the DMP Survey could suggest upside risks to this projection, however.Chart 1.6: Wage growth has fallen and is expected to moderate somewhat furtherMeasures of private sector wage growth and pay settlements (a)FootnotesSources: Bank of England Agents, Brightmine, CIPD, DMP Survey, Incomes Data Research, Labour Research Department, ONS and Bank calculations.(a) AWE private sector regular pay shows the ONS measure of private sector regular AWE growth (three-month average on same three-month average a year ago). The DMP expected pay series is a three-month average, measuring pay growth for the year ahead. It measures total wage growth per worker. The other measures capture basic pay settlements which may differ from AWE growth due to pay drift. The latest AWE data are for the three months to November, while the aqua diamonds are quarterly projections for 2025 Q4–2026 Q2. The DMP expected pay growth is for the three months to December. The Agents’ pay survey diamond shows respondents’ expected average pay settlements in 2026, weighted by employment and sector. The Bank of England settlements database is a 12-month average to December 2025. The Brightmine and CIPD data are three-month averages to December 2025.Measures of underlying services inflation eased over 2025 as a whole but edged up slightly in the most recent data.Measures of underlying services inflation have eased over the past year, and monthly annualised inflation rates are currently at around 4% (Chart 1.7). These measures ticked up slightly in the most recent data, partly reflecting a pickup in restaurant and café prices which rose by an annualised rate of 5% on the quarter. In turn that is probably the consequence of lagged pass-through of last year’s rise in food price inflation, which is expected to moderate in the coming months. The decline in wage growth and a fading impact from higher employer NICs are expected to support a further easing in annual services inflation, to 3.3% by June 2026. That easing is expected to be broad-based, with the trimmed-mean measure of underlying services inflation (Chart 1.7, orange line) expected to fall to around 3 ½% over the next few months, leaving both measures slightly above the range that is likely to be consistent with CPI inflation at target. There is a risk that pass-through from lower wage growth to services inflation is more limited if firms seek to rebuild their margins over and above their costs (Box A of the November 2025 Monetary Policy Report). 39% of firms responding to the DMP Survey said they expected to rebuild margins in the year ahead. But contacts of the Bank’s Agents expect a limited degree of margins rebuild over the next year, mainly reflecting continuing weakness in demand (ASBC – February 2026). Chart 1.7: Underlying services inflation measures have edged up slightlyMeasures of three-month average monthly annualised services price inflation (a)FootnotesSources: ONS and Bank calculations.(a) Measures shown are three-month averages of seasonally adjusted monthly annualised inflation. The low-variance measure is calculated by weighting each component of services inflation by the inverse variance of the change in 12-month inflation of that component from 12 months previously. The maximum adjusted weight is capped at twice its original value. Details of the components that have been included/excluded from the Services excluding indexed and volatile components, rents and foreign holidays measure are included in the accompanying spreadsheet published online. The trimmed-mean measure excludes the 10% largest and 10% smallest price changes. The latest data points are for December 2025. Inflation expectationsHouseholds’ and firms’ inflation expectations remain elevated.Short-term household inflation expectations remain above their long-term averages (Chart 1.8, aqua lines in left panel). The Citi one-year-ahead measure stood at 3.8% in January, down from 4.2% in October but around 2 standard deviations above its 2010–19 average. The equivalent measure from the Inflation Attitudes Survey fell by 0.1 percentage points to 3.5% in 2025 Q4 but is also above its historical average. Medium-term household measures remain elevated. Household inflation expectations are above the range implied by their past relationships with other economic variables. Short-term expectations tend to be sensitive to developments in spot consumer price inflation (Rowe (2016)), however. Consequently, as headline inflation falls in coming months, short-term inflation expectations are expected to moderate towards their pre-pandemic averages, although there are risks around this (Section 3.2 and Box B of the November 2025 Monetary Policy Report).Firms’ inflation expectations also appear somewhat elevated. One-year-ahead CPI expectations of firms responding to the DMP Survey in the three months to January were 3.2% on average, down from 3.4% in the three months to October, while three-year-ahead expectations were unchanged at 2.9% (Chart 1.8, right panel). Firms’ average two-year-ahead CPI expectations in the Deloitte CFO Survey for 2025 Q4 were 2.5%, a little above their 2014–19 average of 2.2%.The own-price expectations of firms responding to the DMP Survey in the three months to January were 3.5% on average for the year ahead, compared with realised price growth of 3.7%, implying little disinflation over the coming year. But firms’ own price expectations tend to respond to realised inflation and so should fall back as CPI inflation falls in coming months.Medium-term inflation expectations implied by financial markets, such as the five-year, five-year forward inflation swap rate, have risen slightly since the November Report. The median respondent to the latest Market Participants Survey expected CPI inflation one year ahead to be 2.2%, a little lower than the 2.3% reported in the November Survey, and to be 2% at the three-year horizon.Chart 1.8: Households’ and firms’ inflation expectations have eased a little but remain elevatedSurvey-based measures of household (a) and business inflation expectations (b) FootnotesSources: Citigroup, DMP Survey, YouGov and Bank calculations.(a) Data shown are from the Citi/YouGov survey and are based on responses to the questions: ‘How do you expect consumer prices of goods and services will develop in the next 12 months?’, and ‘And what do you think will happen to the prices of goods and services, on average, over the longer term – say five to ten years?’. Dashed lines represent the series averages over 2010–19. The latest data points are for January 2026.(b) Data shown are from the DMP Survey and are based on three-month averages of responses to the question: ‘What do you think the annual CPI inflation rate will be in the UK, one year from now and three years from now?’. The latest data points are for January 2026. The DMP Survey data have a short back-run, so no historical averages are shown. 1.2: ActivityDomestic demand Underlying GDP growth remains subdued, consistent with weak growth in potential supply and a small drag from past monetary tightening and uncertainty. Underlying GDP is estimated to have grown by 0.1% in 2025 Q4, down from 0.2% in Q3 and slightly lower than headline GDP growth (Chart 1.9). These growth rates are a little lower than estimated potential supply growth, although that has also been subdued in recent quarters. Market sector output growth has been even weaker than underlying growth over the past 18 months, as past monetary policy restrictiveness and uncertainty, in part relating to Budget 2025, have weighted on activity (Chart 1.10). Public sector output growth has been stronger and is expected to remain robust. Chart 1.9: Underlying GDP growth remains subdued, but is expected to pick up slightly Quarterly growth in headline GDP and underlying growth implied by business surveys (a)FootnotesSources: Bank of England Agents, BCC, CBI, Lloyds Business Barometer, ONS, S&P Global and Bank calculations.(a) The final data point for quarterly headline GDP growth is for 2025 Q3. The diamonds for 2025 Q4 and 2026 Q1 show Bank staff projections. Underlying GDP growth estimates are from a survey indicator model based on a Staggered-Combination MIDAS approach (Moreira (2025)). The orange diamonds to 2025 Q3 show in-sample fitted values of the survey indicator model, and diamonds for 2025 Q4 and 2026 Q1 show out-of-sample projections. The orange swathe shows the interquartile range of estimates from individual survey indicators in the model and values have been interpolated between quarters. Underlying growth is expected to pick up slightly in 2026 Q1, to 0.2%. This is broadly consistent with the S&P Global Composite UK PMI output index, which picked up in January to around its historical average. Agents’ contacts continue to expect subdued growth throughout 2026, citing weak confidence and subdued global demand (ASBC – February 2026).Chart 1.10: Weakness in market sector output growth has been offset by strong growth in public sector outputChanges in sectoral GDP since December 2023 (a)FootnotesSources: ONS and Bank calculations.(a) Public sector output includes public administration and defence, education, and human health and social work activities. Market sector output is total GDP excluding public sector output. The final data points are for November 2025.Household consumption growth has been subdued but picked up in 2025 Q3.Past rises in interest rates have been a major driver of weak consumption growth in recent years, although Bank staff judge that these effects may be starting to wane (Box E). The household saving ratio fell to 9.7% in 2025 Q3 (Chart 1.11), reflecting lower real income growth and a pickup in consumption growth. Initial estimates of the household saving ratio are often subject to substantial revision, however. Despite the most recent fall, the saving ratio remains higher than in the decade prior to the pandemic. A large part of that is likely to reflect past monetary policy restrictiveness. Increases in the effective interest rate on the stock of UK mortgages are continuing to reduce household cash flows, for example, which is weighing on consumption. Past rises in inflation and heightened uncertainty could also be contributing to a higher saving ratio by causing a structural shift in households’ saving preferences (Box D of the November 2025 Monetary Policy Report). There continues to be little evidence that households are saving more for precautionary reasons, however. While evidence from the Bank of England/NMG survey points to higher economy-wide unemployment expectations, households’ own perceived job-loss risk remains low on average. And, whereas a pickup in flows of liquid deposits could signal that households are saving for precautionary reasons, the mix of liquid and illiquid deposits in households’ deposit flows has been similar to historical trends.Evidence from spending indicators suggests that cons