The Monetary Policy Committee voted to cut interest rates to 3.75 per cent
The Bank of England has delivered a pre-Christmas rate reduction, slashing its base interest rate to 3.75 per cent as the labour market deteriorates and signals emerge that price increases will continue moderating into the new year.
In a tight 5-4 decision that hinged on Andrew Bailey’s casting vote, the Monetary Policy Committee (MPC) opted to trim Bank Rate by 25 basis points to its lowest point in nearly three years.
The Governor contended that Britain’s rising unemployment and weaker than anticipated growth indicated a build-up of economic slack, which trumped persistent yet declining inflationary pressures.
The move represents the first rate reduction since August, following rate-setters’ narrow decisions to maintain the Bank’s base rate at two successive meetings in September and November.
Since that time, the economy has fallen short of forecasts, with unemployment leaping above five per cent between October and November, whilst redundancies reached their highest point since February, as reported by City AM.
“We’ve passed the recent peak in inflation and it has continued to fall, so we have cut rates for the sixth time, to 3.75 per cent, today,” Bailey stated.
“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.”
MPC members indicated that declining oil and gas prices, along with a plethora of measures announced at the Chancellor’s Autumn Budget, all suggested a milder inflation outlook for the beginning of 2026.
Rachel Reeves opted to lower regulatory costs imposed on household energy bills and continued the freeze on fuel duty last month which, coupled with dropping commodity prices, prompted officials to decrease their inflation forecast by 0.5 per cent.
Bank staff now anticipate the pace of price increases to reach the rate-setters’ two per cent target as early as the second quarter of next year. The administered price changes announced by Reeves, along with the introduction of several demand-reducing taxes, should result in a decline in price rises when the majority of them take effect in April, officials stated.
Bank of England: Inflationary pressures persist. In November, Bailey aligned with the MPC’s hawkish faction, which included arch hawks Catherine Mann and Megan Greene, as well as deputy governor Clare Lombardelli and chief economist Huw Pill.
Both Bailey and Lombardelli expressed concerns about there being more underlying inflationary pressure than was reflected in the Bank’s central projections.
The governor was the only one to change his stance from last month’s vote, with Pill, Lombardelli, and Greene choosing to maintain the Bank Rate at four per cent, along with external member Catherine Mann. These four officials expressed concerns that recent disinflation will slow into the new year and consistently exceed the target even with a cut.
Forward-looking indicators such as the Bank’s regular survey of finance chiefs and households also suggest a more persistent inflation outlook, according to the MPC’s hawkish faction. In its most recent Decision Maker Panel last month, executives informed officials they anticipated their wage bill to increase by 3.8 per cent over the next year and that they would raise prices by 3.7 per cent; nearly double the Bank’s target.
Households also expect prices to rise by an average of 3.5 per cent, which can trigger so-called second round effects like increased demand for pay rises.
This month, Bailey sided with four other rate-setters, who pointed to weak activity and household spending as reasons to support further easing.
