The Bank of England has cut interest rates by a quarter point, delivering a pre-Christmas boost to the struggling UK economy, but a split vote among its rate-setters pointed to continued concerns about inflation.
The Bank’s nine-member monetary policy committee (MPC) opted by five votes to four to reduce its key base rate from 4% to 3.75%, signalling that it now expects inflation to be “closer” to the 2% target in the first quarter of the new year.
But minutes of the committee’s meeting cast doubt on the pace of any further rate cuts, with the Bank’s governor, Andrew Bailey, warning future decisions would be a “closer call”. It is the sixth rate cut since Labour came to power last year.
Bailey said: “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 cut was widely expected, after official data published on Wednesday showed that inflation fell last month to an annual rate of 3.2%, from 3.6% in October, helped by weaker food prices. That remained well above the Bank’s 2% target, set by the government, but suggested the Bank believed the worst of the inflation “hump” had now passed.
The four MPC members voting to leave rates on hold highlighted the continued strength of inflation in the services sector, and survey data suggesting wage growth is likely to remain strong in the coming months, warning that this could signal that inflation has become entrenched, through “lasting changes in wage and price-setting behaviour”.
One of these hawks, the Bank’s chief economist, Clare Lombardelli, highlighted “elevated wage growth”, which she suggested could “require slowing the pace of future policy easing”. The Bank’s regional agents reported that employers were expecting pay growth of 3.5%, in 2026.
Three of those backing the reduction – Bailey, Sarah Breeden and Dave Ramsden – said they “judged that upside risks to inflation had continued to recede”, but would continue to monitor incoming evidence, especially on wage growth.
However, the two external members supporting the cut, Swati Dhingra and Alan Taylor, fretted about the risks of an economic downturn, suggesting weak consumer spending and the slowdown in the labour market would restrain inflation.
The latest rate cut will be welcomed by the chancellor, Rachel Reeves. She announced a series of inflation-fighting measures at her November budget that were partly aimed at increasing the Bank’s room to manoeuvre 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 said the package, which included cuts to household energy bills, was expected to reduce inflation in the first quarter of 2026 by about half a percentage point.
Labour hopes that lower borrowing costs will help underpin confidence and rekindle economic growth by making it cheaper for consumers and companies to borrow.
Paul Nowak, the general secretary of the TUC, urged the Bank to continue reducing 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 data has pointed to a slowdown in the economy. An early estimate published last week suggested GDP unexpectedly shrank by 0.1% in October, marking four successive months without growth. The MPC said Bank forecasters now expect GDP to be flat in the final three months of 2025, after a 0.1% expansion in the third quarter.
Business groups have blamed Reeves’s £25bn increase in employer national insurance contributions (NICs), alongside the extended period of uncertainty before this year’s budget, for putting the brakes on the economy. The Bank acknowledged that the NICs rise was among the “one-off shocks,” that had “restrained” the downward trend in inflation in recent months.
Independent forecasters including the International Monetary Fund had previously suggested UK consumers are likely to suffer the highest inflation rates among the G7 major economies this year and next.
