Bank of England Cuts Rates to 3.75% as Growth Outlook Worsens

The Bank of England cut the policy rate by a quarter percentage point to 3.75 percent in a 5-4 vote on Wednesday, the sixth reduction since August last year and the lowest level for Bank Rate since early 2023. Officials warned that while inflation has cooled, growth remains weak and the labour market could deteriorate further as Labour policies weigh on hiring. The move followed data showing inflation slowed to 3.2 percent in November, the eighth consecutive monthly decline and the fastest deceleration in years, and the Bank projected inflation would move toward its 2 percent target by April, almost a year earlier than it forecast in August. The central bank also downgraded its growth outlook for the fourth quarter to zero from 0.2 percent.

The cut will ease borrowing costs for many households. The Bank estimated that more than a million borrowers on variable-rate or tracker mortgages will see monthly payments fall by about £13.88 on a typical variable-rate loan and by about £28.77 on a tracker loan. Governor Andrew 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 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." The Bank attributed some inflation relief to measures in Chancellor Rachel Reeves's Budget, including cuts to energy bills and changes to fuel duty that it said would shave around half a percentage point off inflation in April.

Despite the inflation relief, the broader economy remains fragile. October data showed gross domestic product contracted, prompting the Bank to lower its fourth-quarter growth forecast to zero from 0.2 percent. Officials warned that the softer inflation backdrop could support a slower path of rate cuts, but the outlook for trade, investment and hiring remained uncertain as the Labour policy agenda weighs on demand and confidence.

Minutes from the Monetary Policy Committee showed dissent from some members. Alan Taylor, who voted for the cut, warned of 'worrying trends' that could signal a sharper non-linear deterioration in activity and the labour market. The Bank's latest monthly survey of business conditions found that the Budget and Labour's workers' rights bill were deterring hiring, with significant headcount reductions already under way and just over half of employers surveyed planning to decrease headcount next year. Conditions on the high street remained bleak as consumers stayed cautious and focused on value for money.

Reaction from policymakers and industry groups emphasized the policy's timing and potential limits. Shadow Chancellor Sir Mel Stride said lower rates would be welcome for many families but inflation remained well above target, helped by rising unemployment and slow growth under Labour. "This decision reflects growing concerns about the weakness of our economy," Stride said. "Only the Conservatives have a leader with a backbone, a clear plan and a strong team to deliver a stronger economy." Suren Thiru, economics director at the ICAEW accountancy group, called the move a needed step to support households and businesses facing higher costs, while noting the committee remains cautious about inflation persistence. "This rate cut is a particularly welcome early Christmas present for those households being squeezed by high mortgage bills and businesses beset by rising costs," Thiru said. "The decision suggests policymakers are prioritising action to mitigate the impact of a deteriorating economy, even as inflation persistence remains a concern."

Analysts said the pace of policy loosening could slow as the Bank nears what it considers the neutral rate, but conditions could deteriorate quickly enough to spur further action. Thiru noted that the tight vote split underscores that policymakers remain divided, with November's Budget likely tipping the balance toward easier policy. He warned that if the economy continues to crumble, policymakers could move more aggressively, potentially as early as February.

Overall the move marks the sixth rate reduction since August last year, trimming the Bank Rate from 5.25 percent to 3.75 percent. While inflation has cooled to 3.2 percent by November, it remains above the 2 percent target, keeping policymakers cautious about deeper easing given the fragility of growth and the labour market. Many observers expect the Budget measures to provide some offset, but the central bank's outlook remains cautious as inflation continues to drift toward target and growth stabilizes.

Looking ahead, investors will watch incoming data for signs of renewed inflation pressure or further weakness in growth and jobs. The Bank signaled a gradual path of policy loosening could continue if the evidence supports it, but policymakers stressed that the course will depend on how quickly inflation converges to target and how the labour market evolves.