Bank of England cuts rate to 3.75% as inflation cools and growth slows
Narrow 5-4 vote signals cautious path as inflation eases but the economy weakens and unemployment climbs
The Bank of England cut the Bank Rate by a quarter percentage point to 3.75% in a narrowly split 5-4 vote, the sixth reduction since last summer, as policymakers signaled that further easing would be a closer call amid a slowing economy and signs of a softer labor market. Official data released ahead of the decision showed inflation easing to 3.2% in November, the eighth consecutive monthly decline from the peak, and the Bank projected inflation near the 2% target by April, earlier than it had previously forecast. The central bank also downgraded its growth outlook for the fourth quarter, now penciling in zero growth rather than 0.2%, underscoring a fragile domestic backdrop even as price pressures ease.
The rate cut is expected to ease burdens on borrowers with variable-rate or tracker mortgages. The Bank estimated that the typical monthly payment on a tracker-rate loan would fall by about £28.77, and payments on a standard variable-rate loan by about £13.88. The Bank noted that measures in Chancellor Rachel Reeves’s Budget, including energy bill relief and fuel-duty changes, are forecast to shave roughly half a percentage point off inflation in April, providing policymakers room to ease further if growth remains weak.
Bank of England Governor Andrew Bailey said the central bank has passed the peak of inflation and that price pressures are continuing to ease, justifying a sixth rate cut. “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 per cent. 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,” he said. He also cautioned that the economy remains fragile and the labour market warrants vigilance: “While I do not yet see conclusive evidence of a sharper downturn in the labour market, we should be vigilant.”
Among MPC members, Alan Taylor noted there were “worrying trends” that could point to a “sharper non-linear deterioration in activity and the labour market” if conditions worsen, a view echoed by the Bank’s monthly survey of business conditions. The survey showed that measures in the Budget and Labour’s workers’ rights bill were deterring hiring and that significant headcount reductions had already occurred, with just over half of employers surveyed planning to decrease rather than increase headcount next year. High street conditions were also challenging, with consumers remaining cautious and focused on value for money.
The decision completes a cycle of six rate cuts since August of the prior year, moving the policy rate from 5.25% to the current 3.75%. Yet inflation concerns endured longer than hoped, tempering the pace of policy easing. Analysts who had anticipated more aggressive action welcomed the move as a necessary shield for households facing rising mortgage costs and for businesses grappling with higher input prices, even as they warned that the inflation tide remains fragile. Suren Thiru, economics director at ICAEW, called the cut a meaningful relief for households and firms, while noting ongoing risks tied to inflation persistence. “This interest rate cut is a particularly welcome early Christmas present for those households being squeezed by high mortgage bills and businesses being besieged by skyrocketing costs,” he said. “The decision suggests that rate-setters are prioritising action to help mitigate the impact of a deteriorating economy, despite the meeting minutes highlighting some lingering worries over inflation persistence.” He added that the pace of loosening could slow as the Bank approaches what it views as the neutral rate, unless the economy deteriorates more quickly, potentially prompting a February move.
Opposition voices framed the cut as an acknowledgment that inflation remains well above target even as growth falters. Shadow Chancellor Sir Mel Stride argued that the reduction would help families only if inflation moderated more rapidly, contending that Labour’s policy mix has left the economy fragile, with unemployment rising and growth slowing. He also referenced the Bank’s challenge of balancing inflation against a weak economy, arguing that the Conservatives offer a stronger plan for growth.
Looking ahead, policymakers will weigh incoming data on inflation, growth and the labour market to determine whether further easing is warranted. The Bank signaled that the route to the neutral rate remains gradual and data-dependent, but some economists warned that the economy could deteriorate further if hiring falters and consumer demand remains subdued. For now, the relief from lower mortgage costs provides timely support as households navigate an uneven cost landscape, even as the Bank continues to monitor developments closely.
The broader market view remains that policy will adapt to the evolving mix of easing inflation and softening growth, with the next moves shaped by the speed at which inflation returns to target and by the resilience of the labor market. The Bank’s balance of risks continues to tilt toward downside growth in the near term, even as price pressures ease, keeping investors and analysts watchful for any signs that the economy could slip back into stagnation.
