The Bank of England has cut interest rates for the fourth time this year, bringing borrowing costs to their lowest level in almost three years, as policymakers forecast inflation will fall back to the 2 percent target by the spring.
Members of the bank’s nine-member Monetary Policy Committee (MPC) narrowly voted five to four to cut the key interest rate by a quarter of a percentage point to 3.75 percent from 4 percent. The decision provides immediate relief to mortgage holders and businesses with variable rate loans.
The bank said inflation is now expected to fall close to target within six months, partly due to measures announced in last month’s budget to reduce fiscal costs. Officials estimate that government decisions, including removing some levies from energy bills, extending the fuel tax freeze and canceling a planned increase in rail fares, could reduce inflation by up to 0.5 percentage points and bring forward the inflation process by about six months.
Bank of England Governor Andrew Bailey said the peak of inflation had passed but warned that future interest rate cuts were not guaranteed.
“We have passed the recent peak of inflation and it has continued to fall, so we have cut interest rates again,” he said. “We still expect rates to be on a gradual downward trend, but with each cut we make, how far we go becomes more and more important.”
The bank had previously expected that inflation would not reach its target again until 2027. The latest forecasts suggest a significant shift in the outlook following a faster-than-expected decline in inflation in recent months.
The rate cut follows a series of weaker economic data. Inflation fell to 3.2 percent in November, compared to 3.6 percent in October, while unemployment rose to 5.1 percent, the highest in nearly six years. Private sector wage growth has also moderated, easing concerns about continued inflationary pressures.
The economy contracted 0.1 percent in October and the bank now expects growth to stagnate in the final quarter of the year. A survey of businesses conducted by the bank found the economy was “lackluster” in the run-up to the Budget, with retail sales stagnating and investment stalling due to uncertainty over tax policy.
Speculation about possible tax increases in the months leading up to the budget release was cited by businesses as a loss of confidence, although the bank expects the fiscal measures eventually announced will now help curb price rises in 2026.
Bailey cast the deciding vote after failing to support a suspension at the last meeting in November. Deputy governors Sarah Breeden and Dave Ramsden and external MPC members Swati Dhingra and Alan Taylor joined him in voting for the cut.
Huw Pill, the bank’s chief economist, along with deputy governor Clare Lombardelli and outside members Catherine Mann and Megan Greene, voted to keep interest rates at 4 percent, citing ongoing inflation risks.
Breeden said the budget meant “the price shocks administered should not be repeated next year,” bolstering the case for policy easing.
The financial markets had largely priced in this step. Following the announcement, the pound rose 0.25 percent against the dollar to $1.34, while the yield on 10-year British government bonds rose slightly to 4.5 percent. The FTSE 100 slipped 0.1 percent.
Economists said further rate cuts in 2026 would depend on whether inflation continues to fall, the labor market continues to weaken and growth remains subdued. Goldman Sachs has forecast interest rates could fall to 3 percent next year, although others believe the bank is nearing the end of its easing cycle.
Welcoming the decision, Chancellor Rachel Reeves said: “This is the sixth rate cut since the election – the fastest pace of rate cuts in 17 years. This is good news for families with mortgages and businesses with credit. But I know there is more to do to help families with the cost of living.”
For now, the bank has signaled cautious optimism: Inflation is easing faster than expected, but policymakers remain concerned about how far they can safely ease policy without reigniting price pressures.
