The Bank of England has cut interest rates to 3.75 per cent, the lowest level in nearly three years. The Monetary Policy Committee voted five-to-four to reduce rates from 4 per cent, marking the latest in a series of cuts aimed at supporting an economy showing no growth.
The decision follows a sharp drop in inflation to 3.2 per cent in November, down from 3.6 per cent in October. While still above the Bank's 2 per cent target, officials now expect inflation to fall closer to the target by April, significantly sooner than the early 2027 timeline previously forecast.
Governor Andrew Bailey said: «We've passed the recent peak in inflation and it has continued to fall.» The revised outlook came after autumn Budget measures, including support for household energy bills and a freeze on fuel duty, reduced inflation expectations by around 0.5 percentage points.
Economic weakness drives split decision
The narrow vote reflected deep divisions on the nine-member committee. Bailey switched from his previous hawkish stance, citing climbing unemployment and softer growth as outweighing persistent inflation pressures.
Unemployment has jumped above 5 per cent, with redundancies at their highest level since February. Official data showed the economy contracted by 0.1 per cent in October, and the Bank forecasts no growth over the final quarter of 2025.
Four committee members voted to hold rates, expressing concerns about prolonged inflation persistence, particularly in services and wage growth. Finance sector surveys showed expectations for wage increases of 3.8 per cent and price rises of 3.7 per cent over the next year.
Impact on mortgages and savings
The rate cut provides immediate relief for homeowners on variable and tracker mortgages, whose monthly payments will automatically decrease. Fixed-rate mortgage holders, about four in five of all mortgage holders, will not see immediate changes as their rates are locked.
Lenders have already begun trimming rates ahead of the decision. Two-year fixed rates are now available as low as 3.55 per cent, with experts predicting rates could fall below 3 per cent by spring as competition intensifies.
Chancellor Rachel Reeves said: «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.»
Approximately 1.8 million homeowners will need to remortgage in 2026, setting the stage for a potential price war among lenders competing for market share.
Cautious outlook for further cuts
Bailey signaled a measured approach to future reductions, saying: «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.»
Market pricing suggests two further cuts in 2026, which would bring the base rate to 3.5 per cent. However, the close vote and persistent concerns about underlying inflation indicate future decisions remain finely balanced.
Savers face lower returns on easy access accounts, though the best rates currently reach 4.5 per cent. Fixed-rate savings accounts remain unaffected in the short term.
Note: This article was created with Artificial Intelligence (AI).
