Bank of England cuts rates to 3.75% as inflation cools but growth falters
Monetary policy committee trims the Bank Rate for the sixth time since last year, citing slower growth and easing inflation, while warning the economy remains vulnerable to Labour-era policies
The Bank of England on a policy timetable to support a weakening economy cut the Bank Rate by a quarter percentage point to 3.75% in a 5-4 vote, the sixth reduction since August last year. The decision comes on the heels of data showing inflation cooling to 3.2% in the latest reading, an eight-month low, and as the central bank downgraded its growth outlook for the final quarter of the year to zero from 0.2%. Officials said inflation is likely to move toward the 2% target by April, nearly a year earlier than previously forecast, but signaled that the path ahead remains uncertain and that further cuts would be a “closer call”.
The reduction is expected to ease the burden on borrowers with variable-rate and tracker mortgages. The Bank estimated that the typical monthly payment on a tracker rate loan would fall by about £28.77, while payments on a standard variable-rate mortgage would decrease by roughly £13.88. The move also leaves the Bank’s policy rate at the lowest level since early 2023. The Bank attributed part of the inflation improvement to measures in the government’s Budget, including energy bill relief and fuel duty changes, which it said could shave roughly half a percentage point off inflation by April.
The Bank’s forecast still depicts a fragile economy. Gross domestic product contracted in October, leading policymakers to downgrade their Q4 growth outlook to zero. Governor Andrew Bailey stressed that the Bank has passed the peak in inflation and that inflation has continued to fall, but he warned that the labour market may deteriorate further. “While I do not yet see conclusive evidence of a sharper downturn in the labour market, we should be vigilant,” Bailey said, underscoring that the MPC remains mindful of risks to growth and employment.
Alan Taylor, a Monetary Policy Committee member who voted for the cut, said there were “worrying trends” that could point to a sharper deterioration in activity and the labour market, suggesting the committee remains divided over how quickly to ease policy.
The Bank’s latest monthly survey of business conditions painted a dour picture of the labor market and hiring intentions. It noted that the Chancellor’s tax-raising Budget measures and Labour’s workers’ rights bill were deterring employers from hiring, with “significant headcount reductions” already occurring and just over half of employers planning to decrease rather than increase headcount next year. Conditions on the high street were described as grim, with consumers remaining cautious and focused on value for money. The survey underlined the tension between weaker growth and stubborn inflation, and it reinforced the Bank’s cautious stance about the pace and scale of further rate reductions.
The decision drew mixed reactions from political and market observers. Shadow Chancellor Sir Mel Stride argued that lower rates would help families but cautioned that inflation remained above target amid rising unemployment and weak growth under Labour. He asserted that the Bank faced an “impossible dilemma” balancing high inflation against a fragile economy, accusing Labour’s policy mix of exacerbating the problem. “Only the Conservatives have a leader with a backbone, a clear plan and a strong team to deliver a stronger economy,” Stride said.
Suren Thiru, economics director at the ICAEW accountancy group, welcomed the cut as a necessary step to support households under pressure from rising costs and to alleviate the squeeze on businesses struggling with high input costs. He cautioned, however, that the Bank’s minutes show lingering worries about inflation persistence and warned that the pace of loosening would likely slow as the Bank approaches what it views as the neutral rate. “The decision suggests that rate-setters are prioritising action to help mitigate the impact of a deteriorating economy, despite concerns over inflation,” Thiru said. He added that the external environment and domestic demand will continue to be critical drivers of policy in the months ahead, with the possibility of further moves if data deteriorates.
The Bank’s actions come as policymakers monitor the path of inflation against a backdrop of political and fiscal developments. The Budget’s impact on inflation may provide temporary relief, but officials are wary that growth remains weak and unemployment has risen to roughly 5.1% since the election. The central bank’s guidance indicates a preference for gradual easing rather than abrupt shifts, though some members warned that the economy’s weakness could necessitate a faster or deeper response if data worsen.
In the near term, markets will be watching for how inflation evolves toward the 2% target and whether subsequent data support additional rate cuts. If inflation continues to ease and the labour market cools, the MPC could consider further reductions; if not, the Bank may halt further easing or even pause to assess incoming information. The central bank stressed that its policy path would continue to respond to the evolving data, with the neutral rate as a crucial reference point in determining the pace of any future moves.
