ECB and BOE Hold Interest Rates Steady

• The European Central Bank (ECB) kept its key interest rate steady at 2% on Thursday, February 5, 2026, maintaining the pause in a rate-cutting cycle that began in June 2024. Inflation should stabilise at its 2% target in the medium term, the ECB said, reiterating its previous wording.
• The decision comes a day after January’s surprisingly low eurozone inflation figures were released by Eurostat. Consumer prices in the eurozone increased by 1.7% year over year in January, down from December’s reading of 1.9% and significantly below consensus forecasts of a 2.0% rise.
• The stronger euro, which reached its highest level against the US dollar since 2021 in January, makes imports cheaper for buyers in the eurozone, adding downward pressure on inflation. At the same time, the stronger currency could pose a headwind for eurozone exporters just as the region’s economy shows tentative signs of recovery.
• “The economy remains resilient in a challenging global environment. Low unemployment, solid private sector balance sheets, the gradual rollout of public spending on defence and infrastructure and the supportive effects of the past interest rate cuts are underpinning growth,” the eurozone’s central bank added, while giving no forward guidance on interest rates.
• On Thursday, the Bank of England (BOE) also held interest rates at 3.75% following an unexpected increase in inflation in December to 3.4%, up from 3.2% in November and more positive economic indicators in January. The decision was anticipated well in advance by futures markets, which still expect the only rate cut of the year to occur in April.
• The BoE’s Monetary Policy Committee (MPC) voted by a majority of five votes to four in favour of the rate hold. The four members who voted to cut preferred to lower rates by 25 basis points to 3.5%. The BoE still expects the United Kingdom (U.K) inflation to fall back to its 2% target in 2026 and named April as the most likely month because of falling energy prices and the impact of the tax-raising Autumn Budget 2025. The Bank’s governor, Andrew Bailey, predicts “quite a sharp drop in inflation over the coming months.”
• That said, one key factor that has surfaced since the last MPC meeting is political risk, which has pushed up gilt yields and piled pressure on the pound. A crisis currently engulfing UK Prime Minister Keir Starmer could ultimately result in a change of Labour Party leader in 2026, which could itself cause major fiscal policy changes in Whitehall. As well as several other geopolitical factors, the Bank is likely to approach such upheaval with a further degree of caution.

(Source: Morningstar)