The Bank of England (BoE) cut interest rates by a quarter point to 3.75 per cent on Thursday, responding to signs of stagnation and cooling inflation while cautioning that future decisions on reductions were likely to be a “closer call”.
The central bank’s Monetary Policy Committee voted five to four in favour of a sixth rate cut since the summer of 2024, as it forecast that inflation is likely to fall close to its 2 per cent target in the second quarter of 2026.
Andrew Bailey, BoE governor, said he saw scope for “some additional policy easing” but added that the key question was whether inflation settled at the central bank’s target in an “enduring way”.
“We’ve passed the recent peak in inflation and it continues to fall, so we have cut interest rates for the sixth time to 3.75 per cent today,” Mr Bailey said. “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.”
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The move follows official data this week that pointed to a slowing economy, with inflation easing more than expected in November to 3.2 per cent and the unemployment rate climbing to a four-year high of 5.1 per cent in the three months to October.
The UK pound strengthened after the widely expected decision, putting it flat against the dollar on the day at $1.338 (€1.14).
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The rate cut was seen by investors as a near certainty but some had braced for a more dovish signal from the BoE after the recent inflation and jobs data.
Hetal Mehta, chief economist at St James’s Place, said the decision was “slightly more finely balanced than expected, given the raft of downbeat data in recent days”.
Mr Bailey’s remarks indicate that the central bank is approaching the end of its current rate-cutting cycle.
Traders in swaps markets continued to expect another one or two further quarter-point cuts by the end of next year but at a slightly slower pace.
The two-year gilt yield, which is sensitive to changes in interest rates, rose 0.04 percentage points to 3.75 per cent.
Investors were reacting to a “divided vote and lack of commitment on pace of cuts”, said Pooja Kumra, rates strategist at TD Securities.
But the meeting exposed persistent divisions on the MPC, as rate-setters debate whether to prioritise boosting anaemic growth or containing inflation.
The majority of the MPC felt the “disinflation process was on track”. But the members who voted to hold rates placed more emphasis on the possibility of “prolonged inflation persistence”.
Forward-looking wage indicators remain “elevated”, with BoE agents around the country predicting pay settlements of 3.5 per cent in 2026, the bank said.
But the central bank said policies announced in last month’s Budget to contain increases in the cost of living are set to help reduce headline inflation next year, lopping around a half point from CPI inflation in April.
Subdued economic growth and a weakening jobs market will also play a part in bringing down inflation.
BoE staff now expect zero gross domestic product (GDP) growth in the final quarter of the year, capping another year of tepid economic performance.
“Since November, the risk from greater inflation persistence had become somewhat less pronounced, while the risk to medium-term inflation from weaker demand remained,” according to minutes from the rate-setting meeting.
Future rate reductions will hinge heavily on the MPC’s judgment on the “neutral” level for interest rates, where the economy is neither restricted nor spurred.
“While I see scope for some additional policy easing, the path for Bank Rate cannot be prejudged with precision, recognising in part the more limited space as Bank Rate approaches a neutral level,” said Mr Bailey. – Copyright The Financial Times Limited 2025
