The Bank of England has reduced its key interest rate by a quarter point, offering a pre-Christmas lift to the struggling United Kingdom economy, though a split vote among policymakers highlighted ongoing concerns about inflation.
The Bank’s nine-member Monetary Policy Committee voted five to four to lower the base rate from 4% to 3.75%, indicating that it now expects inflation to move “closer” to the 2% target in the first quarter of the new year.
However, minutes from the committee’s meeting raised questions about the speed of future rate cuts, with Governor Andrew Bailey noting that upcoming decisions would be a “closer call”.
This marks the sixth reduction since Labour assumed power last year.
Bailey stated, “We’ve passed the recent peak in inflation and it has continued to fall, so we have cut interest rates for the sixth time, to 3.75% today. We still think rates are on a gradual path downward. But with every cut we make, how much further we go becomes a closer call.”
Thursday’s decision was widely anticipated after official data released on Wednesday showed inflation fell to an annual rate of 3.2% in November, down from 3.6% in October, largely due to weaker food prices.
While still above the Bank’s 2% government-set target, the figures suggested that the worst of the inflation “hump” may be over.
The four MPC members who voted to maintain rates stressed the persistent strength of inflation in the services sector and survey data suggesting wage growth is likely to remain robust. They warned that inflation could become entrenched due to “lasting changes in wage and price-setting behaviour.”
One of the dissenting members, the Bank’s chief economist Clare Lombardelli, pointed to “elevated wage growth,” suggesting it could “require slowing the pace of future policy easing.” Regional agents reported employers anticipated pay growth of 3.5% in 2026.
Among those supporting the cut, Bailey, Sarah Breeden, and Dave Ramsden said they “judged that upside risks to inflation had continued to recede,” while continuing to monitor incoming data, particularly on wages.
External members Swati Dhingra and Alan Taylor, however, voiced concerns about an economic slowdown, warning that weak consumer spending and a softening labour market could limit inflationary pressures.
The rate reduction is expected to be welcomed by Chancellor Rachel Reeves, who introduced measures in her November budget aimed at curbing inflation and providing the Bank with flexibility to reduce rates.
Reeves said, “This is the sixth interest rate cut since the election, that’s the fastest pace of cuts in 17 years, good news for families with mortgages and businesses with loans. But I know there’s more to do to help families with the cost of living.”
The MPC noted that the budget package, including reductions in household energy bills, could lower inflation in early 2026 by roughly half a percentage point. Labour hopes the lower borrowing costs will bolster confidence and stimulate economic growth by making loans cheaper for consumers and businesses.
Paul Nowak, general secretary of the TUC, called on the Bank to continue easing borrowing costs in 2026. “This rate cut is welcome, but one cut every now and again isn’t enough for a fragile economy struggling with stagnant demand and failing confidence,” he said. “It’s vital this marks the start of a sequence of quickfire and substantial rate cuts.”
Recent economic data points to a slowdown. An early estimate suggested GDP unexpectedly fell by 0.1% in October, marking four consecutive months without growth. The MPC projected GDP would remain flat in the final quarter of 2025, following a 0.1% expansion in the third quarter.
Business groups have blamed Reeves’s £25bn rise in employer national insurance contributions, coupled with prolonged pre-budget uncertainty, for slowing the economy.
The Bank acknowledged that the NICs increase was among the “one-off shocks” that had “restrained” the downward trend in inflation in recent months.
Independent forecasters, including the International Monetary Fund, have previously warned that UK consumers are likely to face the highest inflation rates among G7 economies this year and next.
