BoE Cuts Rates Narrowly Ahead of Christmas, Signals More Easing Ahead

LONDON — The Bank of England cut interest rates in a narrowly divided decision ahead of Christmas, delivering what policymakers called a “Santa cut” aimed at reviving a subdued economy while inflation continues to recede. The move, described by participants as a modest step, was driven by the MPC’s view that the inflation outlook had improved enough to allow some monetary policy easing without derailing price stability.

Governor Andrew Bailey, who cast the swing vote in the deliberations, framed the decision as part of an ongoing shift toward a lower-for-longer stance. He said the Bank had “passed the peak of inflation,” and that the 2% target now appeared within reach by April rather than in the more distant horizon of early 2027. “Looking forwards, I do think we’ll continue to have something of a gradual downward path… the calls do get closer,” he said, underscoring that future moves would be more finely balanced.

The MPC’s split vote reflected a central tension: the economy has shown signs of softening in the near term, with several members cautioning that growth is not yet robust enough to warrant a quick, sustained easing cycle. In markets, the message was clear: the committee may still pull the policy lever again, but likely only after confirming further slowdown or resilience in data. One unnamed policymaker described the current period as a “lacklustre” phase for growth, with the Bank noting that the economy is not forecast to pick up meaningfully in the current quarter.

The decision comes after a Budget that had been expected to inject policy stimulus, but which did not immediately translate into a rebound for the real economy. Bailey framed the budget measures as contributing to the quality of the inflation outlook and, by extension, the Bank’s confidence to ease. “It’s part of the reason I can be more confident inflation is going to come down sooner,” he said.

Even as the Bank acts, the path ahead remains contingent on consumer behavior. A high rate of savings, particularly among older households, has been cited by Bailey as a key factor dampening demand. While rate cuts typically reduce the incentive to save and can spur spending, officials caution that confidence among households still tailed by a fragile outlook could limit the immediate impact. Bailey acknowledged that how much people save is not something the Bank adjudicates, but he stressed that “how confident and cautious” consumers feel about the global and local economy does affect saving patterns.

Economists noted that the Bank's decision, while prudent, is unlikely to instantly signal a broad rebound. The Santa cut is being viewed as part of a gradual normalization of policy rates in response to easing inflation and a cooler inflation path. Markets have priced in further reductions next year, with analysts noting the prospect of two additional cuts as the most common scenario, though the exact pace will hinge on incoming data and the trajectory of inflation.

The political response to the move was swift. Opposition Leader Kemi Badenoch criticized the cut as indicative of an economy that needed “life support.” She described the rate reductions as “CPR” and called for policy to focus on growth-boosting measures that could lift activity more meaningfully rather than rely on monetary stimulus alone. The Bank’s leadership, however, stressed that fiscal and monetary policy must work in tandem, and that the inflation outlook supports a measured easing cycle.

For businesses, the decision offers some relief from the pressure of higher financing costs while reinforcing a broader theme: monetary policy has shifted toward accommodation as price pressures ease and the horizon for a return to target becomes clearer. Still, executives have signaled that a rebound in business investment and consumer spending will require more durable improvements in confidence, not just lower rates.

Looking ahead, analysts expect the Bank to tread carefully as it balances the need to support growth with the discipline required to preserve price stability. The central bank has signaled that any future cuts will be contingent on continued inflation improvement and evolving domestic demand. In the near term, the Santa cut may help soften the drag from higher energy prices and global uncertainty, but policymakers caution that a sustainable revival will depend on a combination of policy stability, healthier confidence among households, and a more constructive external environment.

In summary, the Bank of England’s Christmas move marks a strategic shift toward easing in response to a slower economy and cooling inflation. The key question for 2025 will be whether this calibrated approach can generate a broader upturn in activity and confidence, or whether more decisive policy action will be required to lift growth in a still-challenging global economy.