The Bank of England has cut interest rates for the fourth time this year, lowering borrowing costs to their lowest level in almost three years as policymakers forecast that inflation will fall back to the 2 per cent target by spring.
Members of the Bank’s nine-strong monetary policy committee (MPC) voted narrowly, by five votes to four, to reduce the base rate by a quarter of a percentage point to 3.75 per cent, down from 4 per cent. The decision delivers immediate relief to mortgage holders and businesses with variable-rate loans.
The Bank said inflation was now expected to fall close to target within six months, helped in part by measures announced in last month’s budget that will ease household costs. Officials estimate that government decisions, including removing some levies from energy bills, extending the fuel duty freeze and cancelling a planned rail fare rise, could reduce inflation by as much as 0.5 percentage points and bring forward the disinflation process by around six months.
Andrew Bailey, governor of the Bank of England, said the peak in inflation had passed but warned that future rate cuts were not guaranteed.
“We’ve passed the recent peak in inflation and it has continued to fall, so we have cut interest rates again,” he said. “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.”
The Bank had previously expected inflation to return to target only in 2027. The latest projections mark a significant shift in outlook following faster-than-expected disinflation in recent months.
The rate cut follows a run of weaker economic data. Inflation fell to 3.2 per cent in November, down from 3.6 per cent in October, while unemployment has risen to 5.1 per cent, its highest level in nearly six years. Private sector wage growth has also cooled, easing concerns about persistent inflationary pressure.
The economy contracted by 0.1 per cent in October, and the Bank now expects growth to flatline in the final quarter of the year. A survey of businesses conducted by the Bank found the economy was “lacklustre” in the run-up to the budget, with retail sales stagnant and investment stalled amid uncertainty over tax policy.
Speculation over possible tax rises in the months before the budget was cited by firms as a drag on confidence, though the Bank believes the fiscal measures ultimately announced will now help suppress price growth in 2026.
Bailey cast the deciding vote after switching from backing a hold at the previous meeting in November. He was joined in voting for a cut by deputy governors Sarah Breeden and Dave Ramsden, and external MPC members Swati Dhingra and Alan Taylor.
Huw Pill, the Bank’s chief economist, along with deputy governor Clare Lombardelli and external members Catherine Mann and Megan Greene, voted to keep rates on hold at 4 per cent, citing ongoing risks to inflation.
Breeden said the budget meant “administered price shocks should not repeat next year”, reinforcing the case for easing policy.
Financial markets had largely priced in the move. Following the announcement, sterling rose 0.25 per cent against the dollar to $1.34, while yields on ten-year UK government bonds edged up to 4.5 per cent. The FTSE 100 slipped 0.1 per cent.
Economists said further rate cuts in 2026 would depend on whether inflation continues to fall, the labour market weakens further and growth remains subdued. Goldman Sachs has forecast that rates could fall to 3 per cent over the next year, though others believe the Bank is nearing the end of its easing cycle.
Chancellor Rachel Reeves welcomed the decision, saying: “This is the sixth interest rate cut since the election — the fastest pace of cuts in 17 years. That’s 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.”
For now, the Bank has signalled cautious optimism: inflation is easing faster than expected, but policymakers remain wary about how much further they can safely loosen policy without reigniting price pressures.
