BNP Paribas: BOE set to hold rates in March

BNP Paribas analysts anticipate the Bank of England (BOE) will maintain its policy rate at 3.75% in March 2026, despite signals of impending easing later in the year. The decision follows a dovish shift in the BOE's guidance, softer inflation projections, and revised economic outlook, which suggest rate cuts are on the horizon but not yet imminent. Recent data, including a 3.4% year-on-year rise in UK headline inflation and mixed labor market indicators—such as a 4.3% unemployment rate and moderate wage growth—have tempered urgency for immediate action. While inflation remains above the 2% target, the BOE's updated projections indicate a narrowing gap, reducing the risk of aggressive tightening.

Political uncertainty, however, continues to weigh on the outlook. The UK's upcoming February and May elections, coupled with potential leadership shifts within the Labour Party, have introduced volatility into fiscal and monetary policy expectations. BNP Paribas notes that while the BOE is expected to cut rates in March 2026, subsequent easing will likely be delayed until early 2027, with a terminal rate of 3% projected by mid-2027. This cautious approach reflects the central bank's balancing act between inflation control, economic stability, and political risks.

The GBP's performance against the euro has remained range-bound, trading near 0.87, as markets await clarity on the BOE's timeline for rate reductions. Analysts emphasize that the ECB's prolonged policy hold and the UK's narrowing policy rate differential will continue to influence sterling's trajectory. Despite near-term uncertainty, BNP Paribas maintains a 12-month EUR/GBP target of 0.87, underscoring the expectation of gradual BOE easing amid evolving economic conditions.