The Bank of England is likely to keep its benchmark interest rate at 3.75% until at least the end of 2026, according to new projections from ING, as weak growth and easing wage pressures reduce the case for further policy tightening.
Slower growth, stubborn inflation
ING economist Smith said recent GDP data may exaggerate the current strength of the UK economy, with output expected to lose momentum over the coming quarters.
Inflation is forecast to edge back up toward 4% after July, while private sector wage growth is expected to hover around 3%. That combination points to falling real incomes, as pay fails to keep pace with rising prices.
Official figures already show price pressures are proving sticky. The annual inflation rate held at 3.0% in February, well above the Bank of England’s 2% target. This persistence is keeping borrowing costs at what Smith describes as a “restrictive” level for households and corporations.
Households squeezed, pricing power fading
Rising energy prices are set to add further strain to household budgets and could help push unemployment higher. At the same time, firms are facing weaker pricing power, limiting their ability to pass higher input costs on to consumers.
The UK unemployment rate rose to 5.2% in the three months to January 2026, according to the Office for National Statistics (ONS). That marks an increase of 323,000 people out of work over the past year, underlining the impact of tighter financial conditions and weaker demand.
Wage growth cools, real pay barely rising
ONS data show total pay, including bonuses, grew by 3.9% in the three months to January 2026. That is the slowest pace since late 2020. After adjusting for inflation, real pay is only just in positive territory, reinforcing concerns about eroding spending power and subdued consumer demand.
Smith described an economy “caught in between” – not strong enough to feel prosperous, yet still facing price rises that chip away at household finances.
Mixed signals from growth data
In a rare positive surprise, the ONS reported that UK GDP grew by 0.5% in February. On the surface, that challenges the narrative of a slowdown.
However, ING and other analysts view the figure as a temporary bright spot, likely to fade as higher energy costs and mounting geopolitical tensions feed through to activity later in the year.
Policy on hold, conditions challenging
Smith said that if current economic disruptions extend into the summer, the central bank is unlikely to shift from its wait-and-see stance. ING’s analysis suggests the Bank of England will hold rates steady while the economy adjusts to higher costs and weaker growth.
The projected path implies a “neutral” policy setting persisting for an extended period, with inflation expected to gradually moderate and broader financial conditions stabilising rather than easing sharply.
Implications for markets and capital flows
A prolonged period of unchanged rates at 3.75% creates a predictable but demanding backdrop for capital allocation. Yields on lower-risk fixed-income assets remain relatively attractive, providing a viable alternative to more speculative areas of the market.
With high, stable rates and flat real incomes, broad market liquidity may be more selective. Capital is likely to favour assets with clear, demonstrable value over those driven mainly by momentum or narrative.
In this environment, any rallies in risk-on segments of the market could prove fragile and short-lived until there is a clearer path to sustainable economic expansion.
Curious how macro factors like UK rate policy shape crypto? Learn how they interact with digital assets in our crypto and inflation guide today.
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