BoE lowers Bank Rate to 3.75% in close vote as inflation outlook improves

The Bank of England cut the Bank Rate to 3.75%, the lowest level in almost three years, in a knife-edge 5-4 vote that lowers borrowing costs from 4% and signals policymakers expect a gradual path downward even as growth remains fragile. The decision comes as inflation cools more quickly than expected and the Bank projects the rate path could continue easing, though judgments on further reductions next year would be more contested. Inflation is now forecast to fall closer to 2% next year, earlier than previously forecast, while the economy is expected to show zero growth in the final months of the year.

Andrew Bailey, the Bank's governor, said, "we still think rates are on a gradual downward path," and added there was "good news" that inflation was "coming down a bit faster than we thought it would" after a year that included a temporary "hump" in price pressures. He did not specify timing for further cuts.

About 500,000 homeowners have a mortgage that tracks the BoE rate, and Thursday's cut is expected to shave roughly £29 from typical monthly repayments. Savers could see lower yields as well, though most borrowers are on fixed-rate deals and will not feel the full effect immediately. Kayleigh Taylor told the BBC she hoped for a cut as her mortgage repayments had jumped by about £1,000 a month when she remortgaged; her family are due to remortgage next year and could move to a more rural area if rates continue to fall.

The Bank also said that, aided by last month’s Budget and easing oil and gas prices, inflation was likely to fall close to 2% in the spring or summer next year, a sharper improvement than it had forecast previously, which had pointed to 2027. Budget measures announced by Chancellor Rachel Reeves included a £150 cut to household energy bills and freezes to fuel duty, medical prescriptions and rail fares. Yet the Bank noted that weaker economic growth in November had led it to expect zero growth in the final months of this year. The Bank said information from businesses around the country suggested a "lacklustre economy," with firms concerned by the run-up to the Budget, and consumers remaining cautious and focused on value for money.

Ruth Gregory, deputy chief UK economist at Capital Economics, said inflation could fall further than the Bank expected, making a February rate cut possible. She added it was plausible that "rates will fall to 3% in 2026 rather than to the low of 3.5% currently priced into the market."

Chancellor said it was the "sixth interest rate cut since the election — that's the fastest pace of cuts in 17 years, good news for families with mortgages and businesses with loans." Shadow chancellor Mel Stride said while lower interest rates would be "welcome news for many families," the cut reflected "growing concerns about the weakness of our economy" and that "the economic mismanagement of Rachel Reeves has left the Bank of England with an impossible dilemma, balancing high inflation against a fragile economy."

The Bank, which is independent of the government, sets interest rates in an attempt to keep consumer price rises under control. The theory behind increasing interest rates to tackle inflation is that by making borrowing more expensive, more people will cut back on spending and that leads to demand for goods falling and price rises easing. But it is a balancing act, as high interest rates can harm the economy as businesses hold off from investing in production and jobs. The Bank warned that the path ahead would remain uncertain as it weighs inflation against growth and affordability for households.

Investors and borrowers will be watching the next policy meeting for signs about the size and timing of further moves. The Bank’s guidance that the path remains gradual, with every cut raising questions about how far it will go, underscored a cautious stance amid slowing demand and global price pressures.