Bank of England cuts rates to 3.75% as inflation eases and growth remains weak

The Bank of England has lowered its benchmark interest rate from 4% to 3.75%, taking borrowing costs to their lowest level in nearly three years as policymakers respond to easing inflation, rising unemployment, and a subdued economic outlook.

The move, which was widely anticipated by markets, marks the sixth rate cut since last summer and brings the base rate below 4% for the first time since early 2023.

The decision followed data showing UK inflation slowed to 3.2% in the year to November, alongside signs of weakening momentum in the labour market and broader economy.

Narrow vote reflects economic uncertainty

The Monetary Policy Committee voted 5–4 in favour of the cut, underlining the finely balanced debate within the Bank.

Governor Andrew Bailey was the swing voter, having backed a hold at the previous meeting.

Explaining the decision, Bailey said the disinflation process is becoming more firmly established, giving policymakers greater scope to ease policy.

“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 said.

Bailey added that measures announced in the recent Budget are expected to reduce inflation further in the near term, predicting they would take around 0.5 percentage points off the headline rate.

The Bank now believes inflation will be “closer” to its 2% target by April, rather than in 2027.

However, he cautioned that there is not yet “conclusive evidence” of a sharp deterioration in the jobs market and that inflation expectations have not shifted lower enough to justify an aggressive easing cycle.

Weak growth and rising unemployment weigh on outlook

Alongside easing inflation, concerns over the labour market and economic momentum played a key role in the rate cut.

UK unemployment rose to 5.1% in the three months to October, up from 4.3% a year earlier, its highest level since January 2021.

The slowdown has been felt most sharply by younger workers, with the Office for National Statistics saying increases in unemployment and declines in payrolls have been concentrated in several younger age cohorts.

Data from the Office for National Statistics, which predates the Budget, suggests many employers paused hiring while awaiting clarity on tax and spending plans.

The Bank also pointed to a lacklustre economy, with no growth now expected in the final quarter of 2025.

While most MPC members agree rates are likely to continue falling next year, some who voted for the cut indicated that the pace — roughly one cut per quarter — could slow from here.

Property sector welcomes cut, but caution remains

The rate reduction is expected to bring some relief to borrowers and businesses, though savers may see lower returns.

The housing and mortgage sectors responded positively to the decision.

Guy Gittins, chief executive of Foxtons, said: “Today’s base rate cut is a positive boost for the housing market and should help maintain the momentum we’ve seen building throughout 2025 as we head towards the new year.”

"Lower borrowing costs will improve affordability for buyers, while giving additional confidence to sellers that demand will continue to strengthen following the removal of Autumn Budget uncertainty", Gittins added.

Jonathan Samuels, chief executive of Octane Capital, added that the cut “should help reinforce confidence across the wider economy,” easing pressure on borrowing costs and supporting spending and investment decisions.

Despite the pre-Christmas timing of the move, the Bank struck a cautious tone.

While rates are expected to edge lower, policymakers stressed that further cuts will be more contested, and restoring confidence among businesses and consumers may take more than modest monetary easing alone.