BoE cuts rate to 3.75%, signaling gradual path of further reductions

The Bank of England on Thursday cut its Bank Rate to 3.75%, the lowest level in nearly three years, in a knife-edge 5-4 vote that lowered the rate from 4% amid concerns about rising unemployment and weak growth. The central bank said policy will continue on a gradual downward path, but warned that judgments on further reductions next year would be more contested and data-dependent.

Bank Governor Andrew Bailey described the decision as part of a gradual path downward and noted there was “good news” that inflation was coming down faster than anticipated after a hump earlier in the year. He told broadcasters there was no fixed timetable for further cuts, and that with every reduction, the question of how much further to ease becomes a closer call. The Bank reiterated that its outlook hinges on incoming data and the evolving inflation trajectory.

On inflation, the Bank now expects price growth to approach the 2% target next year, earlier than previously forecast. It said this improvement reflects the impact of last month’s Budget measures and easing oil and gas prices, alongside a slower pace of domestic price pressures. The forecast marks a shift from earlier projections that inflation would take longer to near target levels, signaling a more favorable path for real incomes if the economy can absorb the slower growth period.

The Bank also indicated that growth remains fragile. It projected zero or near-zero growth for the economy in the final months of this year, with a lacklustre backdrop for consumer and business activity. The government has placed growth higher on its agenda, implementing measures designed to boost living standards and invest in public and private sectors, while the Bank continues to assess how these policies interact with demand and inflation.

The Budget’s impact, combined with softer inflation, has fed expectations that the next few rate decisions could be data-dependent and potentially smaller in scale. In particular, inflation’s downward drift toward 2% would provide some headroom for the Bank to ease further, but policymakers warned that any further cuts would be contingent on satisfying conditions around growth and the evolution of wage and price pressures.

For households and lenders, the move could ease payment pressures in the near term. About 500,000 homeowners have mortgages that track the Bank Rate, and Thursday’s cut is expected to reduce typical monthly repayments by around £29. Those on standard variable rates are also likely to see lower payments, although most mortgage customers are on fixed-rate deals and will not feel the immediate impact.

Kayleigh Taylor, who is remortgaging next year, told the BBC she hopes rates continue to fall, even as she navigates higher costs from last year’s remortgage. “When we bought the property that we’re in now, because of the circumstances we had to lock in for just a year. So then we were forced to remortgage and it was at the worst time,” she said. Her family considers moving if rates decline further, illustrating how a shifting policy path can influence household decisions.

The chancellor welcomed the move as broadly favorable for families with mortgages and for businesses with loans, noting it was the sixth rate cut since the election and the fastest pace of easing in 17 years. Still, opposition voices argued the downturn in rates underscored broader concerns about the economy’s weakness and the government’s handling of growth.

Analysts weighed in on the path forward. Ruth Gregory, deputy chief UK economist at Capital Economics, said the inflation trajectory could support a rate cut as soon as February, with some forecasters suggesting rates could fall to around 3% in 2026 if disinflation continues. She also noted the possibility that further easing beyond 2024 would be a matter of policy balance rather than predetermined timing.

The Bank emphasized that it remains independent of political direction, tasked with balancing the goal of keeping inflation near target with supporting the economy’s growth trajectory. While inflation has cooled from its highs, the Bank stressed that uncertainty remains about the strength of domestic demand and the persistence of price pressures in services and housing.

In its accompanying outlook, the Bank signaled that the economy’s path would continue to hinge on both international developments and domestic policy, with many sectors watching consumer sentiment and retail pricing as key indicators for the months ahead. As the year closes, policymakers will monitor data on wage growth, employment, and inflation to determine how far and how fast they can ease further while maintaining financial stability and supporting living standards.