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The Bank of England has kept interest rates unchanged at 3.75%, marking its first freeze of the year. The Bank's nine-member Monetary Policy Committee (MPC) agreed to hold in a 5-4 vote split. Four members voted to reduce the Base Rate by 0.25 percentage points to 3.5%.

It came as the central bank also warned that economic growth is now set to be weaker than previously expected, while unemployment is on track to jump higher.

Andrew Bailey, the governor of the Bank of England, said: "We now think that inflation will fall back to around 2% by the spring. That's good news. We need to make sure that inflation stays there, so we've held interest rates unchanged at 3.75% today. All going well, there should be scope for some further reduction in the bank rate this year."

New forecasts from the Bank show the rate of Consumer Prices Index (CPI) inflation dropping to the target this year, having previously said this would happen in 2027.

The MPC thinks that measures announced in the Chancellor's autumn budget will help to slow inflation, particularly a package of support to bring down household energy bills from April.

Central banks typically use elevated interest rates to bring down inflation, but reduce them if inflation is dropping too quickly or there is a need to stimulate further economic growth.

The base rate significantly affects mortgage and loan costs and influences the interest rates banks offer on savings accounts. It peaked at 5.25% in late 2023, but policymakers have since reduced it, as inflation has dropped to more manageable levels.

Inflation is currently rising at a pace of 3.4% - far lower than the 11% highs seen during 2022's energy crisis, but still higher than the Bank's 2% target.

Economists said after the tight vote that it has increased the likelihood that interest rates will be cut next month.

James Smith, developed markets economist at ING, said: "Everything comes down to Governor Bailey's vote in March.

"Our sense is that if the data follows recent trends - higher unemployment/falling payrolls, slower wage growth - then he will swing behind a cut next month."

Matt Swannell, chief economic adviser to the EY Item Club, said the vote in the rates decision was closer than expected, increasing the chances of a rate cut as soon as next month.

He said: "The latest assessments by most committee members suggest that they've become less concerned about sticky wage and price pressures at the start of the year, and more focused on the subdued growth outlook and the potential downside knock-on effect for the jobs market.

"There were no promises made on when the Bank of England may cut rates again, but such a closely balanced vote split clearly opens the door to a rate cut at the March meeting."

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