Bank of England cuts interest rates to 3.75%
The Bank of England (BOE) made a closely contested decision to reduce interest rates in its final monetary policy move of 2025. The central bank’s nine-member monetary policy committee (MPC) voted 5-4 to cut the benchmark interest rate by 25 basis points to 3.75%, marking the fourth cut of the year. This decision comes amidst lackluster economic data, a softening labor market, and a recent decline in inflation that exceeded expectations.
BOE Governor Andrew Bailey sided with the more dovish members of the committee in favor of the rate cut, despite four policymakers arguing that the current inflation rate of 3.2% in November is still significantly above the central bank’s 2% target. The MPC stated that while inflation remains above target, it is expected to decrease towards the target in the near future. However, the extent of further monetary policy easing will depend on the evolving outlook for inflation.
Following the announcement, Sterling remained flat against the dollar, as did the FTSE 100. The yield on the benchmark 10-year U.K. gilt increased by 3 basis points to 4.510%. While the rate cut will benefit consumers by making borrowing cheaper, it may lead to lower returns on savings for some.
Chancellor Rachel Reeves applauded the rate cut, stating that it would alleviate cost of living pressures for families with mortgages and businesses with loans. Looking ahead to 2026, economists anticipate that the BOE could implement another rate cut in early 2026 if macroeconomic indicators continue to support such a move. The central bank predicted no growth in the economy for the fourth quarter of 2025.
Analysts from Barclays and JPMorgan foresee additional rate cuts in the coming months, with Barclays projecting two more cuts in March and June, bringing the base rate down to 3.25%. However, concerns about high-side wage expectations for 2026 may influence the BOE’s decision-making process.
Morgan Stanley’s Chief U.K. Economist and strategist expect another rate cut in February due to declining inflationary pressures and an increase in the jobless rate. They anticipate a conservative approach to future cuts following this initial move. Looking further ahead, they believe the BOE may implement two more rate cuts in the first half of 2026, in April and June, based on inflation and pay data trends.
Overall, the BOE’s decision to cut interest rates reflects a cautious approach to managing economic challenges and supporting growth in the UK. Investors and consumers will closely monitor future developments to gauge the impact of these policy measures on the economy.
