Bank of England Keeps Rates at 3.75% as Fiscal-Monetary Policy Coordination Shapes Outlook

The Bank of England has maintained interest rates at 3.75%, with Chancellor Rachel Reeves’s fiscal policy measures playing a crucial role in enabling future monetary easing. This coordination between fiscal and monetary policy is reshaping the economic landscape.
The monetary policy committee’s 5-4 vote reflected assessment of how government spending and tax decisions interact with interest rate policy. Reeves’s budget measures, particularly utility bill cuts and rail fare freezes from April, directly reduce inflation pressures, creating room for the Bank to cut rates without risking an inflation resurgence.
This fiscal-monetary coordination represents a shift from periods when the two policy levers worked at cross-purposes. During some previous episodes, loose fiscal policy forced tighter monetary policy to control inflation. Now, anti-inflationary fiscal measures complement monetary easing, amplifying their combined impact.
Governor Andrew Bailey acknowledged this dynamic by highlighting how government measures contribute to the projected inflation decline to around 2% by spring. The Bank’s forecast that inflation will fall to 2.1% by mid-2026, compared to 3.4% in December, incorporates the fiscal support. Without these budget measures, the Bank might need to maintain higher rates for longer.
However, other aspects of fiscal policy, particularly the increase in employer national insurance contributions and rising minimum wage, have contributed to employment stagnation and weaker growth. The GDP forecast of 0.9% and unemployment projection of 5.3% partly reflect these labor cost increases. This illustrates how fiscal policy can simultaneously support monetary policy goals (through anti-inflation measures) while complicating them (through growth-dampening tax increases). The committee’s 5-4 split partly reflects different assessments of this complex fiscal-monetary interaction.