The Bank of England has kept interest rates unchanged at 3.75%, with recent financial market volatility encouraging caution in policy adjustments. Unstable markets can amplify the effects of rate changes unpredictably.
The monetary policy committee’s 5-4 vote reflected awareness that financial markets are sensitive to policy signals and can overreact to changes. When markets are volatile, small rate moves can trigger disproportionate asset price swings, complicating economic management.
Market volatility affects policy transmission through confidence channels. If rate cuts prompt excessive risk-taking in volatile markets, asset bubbles could form that later burst painfully. If holding rates during volatility causes market stress, credit conditions could tighten excessively, deepening slowdowns.
The six rate cuts since mid-2024 occurred during varying market conditions. Some proceeded smoothly while others triggered notable market responses. The committee must judge whether current market conditions warrant caution or whether anticipated volatility shouldn’t delay necessary policy adjustments.
Governor Bailey’s projection that inflation will fall to around 2% by spring provides market-reassuring guidance that policy is on track. His endorsement of 50-50 odds for March reflects partly awareness that markets need time to adjust expectations without panic. Financial market pricing currently aligns with committee guidance, suggesting effective communication. The GDP forecast of 0.9% and unemployment rising to 5.3% indicate economic weakness that might argue for aggressive easing despite market volatility. Chancellor Reeves’s budget measures, including utility bill cuts and rail fare freezes from April, provide policy support outside monetary channels. Inflation at 2.1% by mid-2026 depends partly on markets functioning smoothly to transmit policy.
