Bank of England cuts interest rates to 3.75% in pre-Christmas boost for struggling economy | Interest rates
The Bank of England cut interest rates by a quarter of a point, providing a pre-Christmas boost to the struggling UK economy, but a split vote among rate-setters signaled concerns about inflation remain.
The bank’s nine-member monetary policy committee (PPC) agreed by five votes to four to cut its key base rate from 4% to 3.75%, signaling that it now expects inflation to be “close” to the 2% target in the first quarter of the new year.
But minutes of the committee meeting cast doubt on the pace of further rate cuts, with Bank Governor Andrew Bailey warning that future decisions would be a “close call”. This is the sixth rate cut since Labor came to power last year.
“We have passed the recent peak in inflation and it has continued to fall, so we cut interest rates for the sixth time today to 3.75%. We think interest rates are still on a gradual decline path. But with every cut we make, it gets closer to how far we’ll go,” Bailey said.
Thursday’s cut was widely expected after official data published on Wednesday showed inflation fell to 3.2% annually last month from 3.6% in October, helped by weak food prices. This remained well above the Bank’s 2% target set by the government, but showed that the Bank believed the worst of the “hump” in inflation was now over.
The four MPC members who voted to keep rates steady highlighted the continuing strength of inflation in the services sector, with survey data suggesting wage growth likely to remain strong in the coming months, warning that this could signal a consolidation of inflation through “permanent changes in wage and price-setting behaviour”.
One of these hawks, the Bank’s chief economist Clare Lombardelli, highlighted “rising wage growth” and suggested that this “may require slowing the pace of future policy easing.” The bank’s regional representatives reported that employers expect wage increases of 3.5% in 2026.
Three of those supporting the cut – Bailey, Sarah Breeden and Dave Ramsden – said they “judged that upside risks to inflation continue to diminish” but would continue to monitor incoming evidence, particularly on wage growth.
But Swati Dhingra and Alan Taylor, the two outside members who supported the cut, worried about the risks of an economic downturn, arguing that weak consumer spending and a slowdown in the labor market would limit inflation.
The latest rate cut will be welcomed by chancellor Rachel Reeves. In his November budget, he announced a series of inflation-fighting measures aimed in part at increasing the Bank’s room to maneuver to lower interest rates.
Reeves said: “This is the sixth rate cut since the election, the fastest cut in 17 years, which is good news for families with mortgages and businesses with loans. But I know there is more to do to help families with living costs.”
The package, which includes cuts to household energy bills, is expected to reduce inflation by about half a point in the first quarter of 2026, PPC said.
Labor hopes lower borrowing costs will help bolster confidence and revive economic growth by making it cheaper for consumers and businesses to borrow.
TUC general secretary Paul Nowak called on the Bank to continue reducing borrowing costs in 2026. “This rate cut is welcome, but an occasional cut is not enough for a fragile economy struggling with stagnant demand and loss of confidence,” he said. “It is vital that this marks the beginning of a series of rapid fires and significant rate cuts.”
Latest data point to a slowdown in the economy. An early forecast published last week suggested GDP unexpectedly contracted by 0.1% in October, marking four consecutive months of no growth. MPC said the Bank’s forecasters now expect GDP to remain flat in the final three months of 2025, following 0.1% growth in the third quarter.
Business groups blamed Reeves’ £25bn increase in employer national insurance contributions (NICs) and a long period of uncertainty ahead of this year’s budget for putting the brakes on the economy. The bank acknowledged that the NIC rise was among the “one-off shocks” that had “limited” the downward trend in inflation in recent months.
Independent forecasters, including the International Monetary Fund, have previously suggested that UK consumers will suffer the highest inflation rates among major G7 economies this year and next.
