UK (Parliament Politics Magazine) – Bank of England lowers interest rates to 3.75% before Christmas to support the economy, but the MPC signals future cuts depend on inflation trends.
As reported by Heather Stewart of The Guardian, UK interest rates fell by a quarter point before Christmas, though the MPC’s split vote signals ongoing inflation risks.
How did the BoE MPC vote on the latest rate cut?
The nine-member monetary policy committee at the central bank voted five to four to lower the base rate from 4% to 3.75%, showing that inflation is expected to move closer to the 2% target in the first quarter of next year.
The MPC’s meeting notes raised doubts about how quickly further rate cuts might come, with Bank Governor Andrew Bailey describing future decisions as a “closer call.” This marks the sixth cut since Labour took office last year.
Mr Bailey said,
“We’ve passed the recent peak in inflation and it has continued to fall, so we have cut interest rates for the sixth time, to 3.75% today. We still think rates are on a gradual path downward. But with every cut we make, how much further we go becomes a closer call.”
He added,
“Data news since our latest meeting suggests that disinflation is now more established. CPI inflation has fallen from its recent peak and upside risks have eased. Measures in the Budget should reduce inflation further in the near term. The key question for me now is the extent to which inflation settles at the 2% target in an enduring way. Slack has continued to accumulate in the economy. Unemployment, underemployment and flows from employment to unemployment have all risen. While I do not yet see conclusive evidence of a sharper downturn in the labour market, we should be vigilant.”
The move follows official data from the national statistics office showing CPI inflation fell sharply to 3.2% in November, down from 3.6% in October.
Minutes of the MPC’s meeting read,
“This was above the 2 per cent target but, following the Budget announcements on administered prices and indirect taxes, headline inflation was now expected to fall back more quickly in April, to closer to 2 per cent.”
The four MPC members who voted to keep rates unchanged pointed to persistent inflation in the services sector and survey data indicating continued wage growth, warning that inflation may be becoming entrenched due to lasting changes in wage and price-setting behaviour.
Bank chief economist Clare Lombardelli, one of the hawkish MPC members, warned that “elevated wage growth” may require slowing future rate cuts, with regional agents reporting employers expect pay rises of 3.5% in 2026.
The three members supporting the rate cut, Mr Bailey, Sarah Breeden, and Dave Ramsden, said they believed upside risks to inflation had eased but emphasized they would continue to monitor incoming data, particularly on wage growth.
The two external MPC members supporting the cut, Swati Dhingra and Alan Taylor, expressed concern over a potential economic downturn, suggesting that slow consumer spending and a weak labour market would act as a brake on inflation.
According to the MPC, measures such as cuts to household energy bills could reduce inflation by about 0.5 percentage points in the first quarter of 2026.
Recent figures indicate a slowing UK economy, with early forecasts showing GDP contracted 0.1% in October, marking four months without growth. The MPC said Bank forecasters now expect GDP to remain flat in the last three months of 2025, after a 0.1% rise in Q3.
How did Mel Stride respond to the latest interest rate cut?
Commenting on the latest interest rate cut, shadow chancellor Sir Mel Stride posted on X,
“Lower interest rates will be welcome news for many families – but rates are being cut despite inflation remaining well above target, thanks to rising unemployment and low growth under Labour.”
He stated,
“This decision reflects growing concerns about the weakness of our economy. Labour’s choices have left us with the highest inflation in the G7, while the latest figures showed the economy shrinking and unemployment back to pandemic levels.”
Mr Stride added,
“The economic mismanagement of Rachel Reeves has left the Bank of England with an impossible dilemma, balancing high inflation against a fragile economy. Only the Conservatives have a leader with a backbone, a clear plan and a strong team to deliver a stronger economy.”
What did Rachel Reeves say about the recent interest rate cuts?
Responding to the latest interest rate cuts, Chancellor Rachel Reeves posted on X,
“This is 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.”
She added,
“But I know there’s more to do to help families with the cost of living. That’s why at the Budget we froze rail fares and prescription charges, and will be cutting £150 off the average energy bill next year.”
How did economists react to the Bank of England’s latest rate cut?
Chris Beauchamp, chief market analyst UK at investment platform IG said,
“While today’s decision is the foregone conclusion – next year’s outlook is the crucial element. Yesterday’s inflation data has handed the BoE the justification it needs to move more aggressively in the new year.”
He stated,
“With headline inflation undershooting expectations and wage pressures finally easing, the obstacles to further cuts are rapidly disappearing. Governor Andrew Bailey’s guidance will set the tone for early 2026. And the committee’s updated forecasts will be crucial.”
Mr Beauchamp added,
“If they downgrade inflation projections for 2026, that effectively pre-announces further easing. Markets are already pricing two to three cuts next year, and that could shift higher if the BoE signals comfort with the inflation outlook.”
Paul Nowak, the general secretary of the TUC, said,
“This rate cut is welcome – but one cut every now and again isn’t enough for a fragile economy struggling with stagnant demand and failing confidence.
He added,
“It’s vital this marks the start of a sequence of quickfire and substantial rate cuts.”
Lorna Hopes, mortgage specialist at the financial advisers Smith & Pinching,
“The Bank of England has delivered the Christmas present that thousands of homebuyers, and anyone about to remortgage, was hoping for.”
She added,
“Many borrowers can now get a fixed rate of well under 4 per cent, and there are some eye-catching deals available to some remortgagers and buyers with a big deposit. Anyone with a variable rate mortgage will see their monthly payments tick down automatically as a result of today’s decision, but the biggest winners might be the thousands of people due to come off a two-year fixed rate deal in 2026; they should be able to remortgage onto a much lower rate.”
Muniya Barua, Deputy Chief Executive at BusinessLDN, said,
“This cut to interest rates will provide a measure of relief for some firms but, with growth flatlining, what they really need to see is new action to get the economy moving again.”
She added,
“The Government must have a clear focus on delivery as we head into 2026 if it is to bolster business confidence. Tackling barriers that could hold up major infrastructure projects, thinking again about reforms to the business rates system that could hit investment, and ensuring that a proposed overnight stay levy is ringfenced to support growth would help to start the new year on the right footing.”
Kate Steere, personal finance expert at comparison site Finder, said,
“It’s blow after blow for savers at present. Following the budget, which saw cash ISA allowances cut and tax on savings interest increased, they’ve now been hit with a further base rate cut.”
She added,
“While widely expected, this will act as a green light for providers to slash their rates further. In fact, NatWest and Bank of Ireland already dropped rates on several products yesterday and today before the cut was even announced.”
What did city economists predict for Bank of England rates in 2026?
Analysts predict that the Bank of England could cut rates in 2026, even as officials warn future easing will be a “closer call.”
Simon Dangoor, deputy chief investment officer (CIO) of fixed income at Goldman Sachs Asset Management, said,
“Weak data could give the BoE scope to cut rates more than markets currently anticipate next year. The labour market continues to show signs of deterioration, and we expect inflation to remain well-behaved through 2026. If evidence continues to build confirming these trends, the MPC may adopt a more dovish stance.”
James Smith, ING’s UK economist, says the bank expects two rate reductions in early 2026, lowering the Bank rate to 3.25%.
He said,
“Fundamentally, the Bank – or most officials at least – still think further cuts are likely. It has not changed our mind that the Bank will cut rates twice more next year. The timing is admittedly uncertain. We narrowly expect another cut in February, but it’s a close call. There’s only one more round of inflation and wage/jobs data before then, suggesting the views of the committee won’t shift enormously over the next eight weeks.”
Mr Smith added,
“If it’s not February, then we think it’ll be March. Fundamentally, the UK should look like much less of an inflation outlier next year. Headline CPI should be very close to 2% by May – maybe even below. That’s why we expect another cut in the second quarter, leaving the Bank Rate at 3.25% thereafter.
Deutsche Bank’s chief UK economist, Sanjay Raja, anticipates that internal Bank divisions will ease in 2026 and forecasts two rate reductions.
He said,
“Big picture, Bank Rate remains on a downward trajectory. We expected three things heading into the Bank’s final meeting of the year: one, a quarter-point rate cut, two, a 5-4 vote spit, and three, the MPC raising the bar for further rate cuts. Today, we got all three. Importantly, we expect the precipitous drop in CPI next year alongside a deteriorating labour market to keep quarterly rate cuts in play next year.”
Mr Raja continued,
“We stick to our long-standing call of two more rate cuts in 2026: one in March, and one in June, taking Bank Rate to 3.25%. Risks are skewed to a slower but deeper easing cycle.”
How are UK interest rates determined?
UK interest rates are primarily determined by the Bank of England, specifically through its Monetary Policy Committee (MPC). While the BoE sets the “base rate,” individual commercial banks use this as a benchmark to set their own rates for mortgages, loans, and savings.
The MPC is a nine-member panel of economists, five from within the BoE and four external experts, responsible for maintaining monetary stability. Their primary goal is to keep inflation at a 2% target set by the UK Government.
They meet eight times a year (roughly every six weeks) to vote on whether to raise, lower, or maintain the base rate. As of December 18, 2025, the base rate was cut to 3.75%.
What is the base rate?
The base rate, also known as the Official Bank Rate, is the interest rate that the central bank of a country charges commercial banks and other financial institutions for secured overnight lending. This rate serves as a crucial benchmark that influences the interest rates commercial banks set for their own customers’ mortgages, loans, and savings accounts.
The central bank uses the base rate as a primary tool to manage the economy and control inflation, with a government-set target of 2%.