Bank of England Cuts Interest Rates to 3.75% After Narrow Vote as UK Economy Weakens

The Bank of England cuts interest rates to 3.75% after a tight 5–4 vote as inflation cools and economic weakness deepens across the UK.

The Bank of England on Thursday cut its benchmark interest rate by 25 basis points to 3.75%, marking a cautious shift in monetary policy as economic weakness intensifies and inflation continues to ease. The decision was taken by a narrow 5–4 vote of the Monetary Policy Committee (MPC), with Governor Andrew Bailey casting the decisive vote in favor of easing.

The rate cut brings borrowing costs to their lowest level since early 2023 and represents the first reduction since August. It is also the fourth rate cut in 2025, underscoring growing concern within the Bank of England over slowing growth and weakening demand across the UK economy.

The Monetary Policy Committee voted by a majority of 5-4 to cut interest rates to 3.75%.

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— Bank of England (@bankofengland) December 18, 2025

Inflation Cools Faster Than Expected

The Bank of England cited fresh inflation data as a key reason for easing policy. Consumer price inflation fell to 3.2% in November, down from 3.6% in October, and below the central bank’s forecast of 3.4%.

Officials pointed to lower energy prices, moderating food costs, and easing wage growth as major drivers of the decline. Core inflation indicators have also softened, reinforcing confidence at the Bank of England that earlier tightening measures are now feeding through the economy.

Despite the improvement, inflation remains above the 2% target, prompting policymakers to emphasize continued vigilance.

UK Economic Growth Remains Weak

Beyond inflation trends, the Bank of England is increasingly concerned about deteriorating economic conditions. Data show the UK economy contracted by 0.1% in the three months to October, reflecting weak household spending and subdued business investment.

Labor market conditions have also softened. Unemployment rose to 5.1%, the highest level since early 2021, while wage growth excluding bonuses slowed to 4.6%, signaling easing pressure after a prolonged period of tightness.

Governor Andrew Bailey said the balance of risks has shifted, noting that while inflation is moving in the right direction, economic momentum remains fragile.

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Divided MPC Highlights Policy Tensions

The close vote within the Bank of England highlights sharp divisions over the pace of monetary easing. Four MPC members — Sarah Breeden, Swati Dhingra, Dave Ramsden, and Alan Taylor — supported the rate cut, warning that prolonged tight policy could deepen the economic slowdown.

Four others voted to hold rates steady, citing concerns that services inflation, still elevated at 4.4%, could remain persistent into 2026 and threaten price stability.

The split reflects ongoing uncertainty within the Bank of England over how quickly inflation will converge to target.

Cautious Policy Outlook for 2026

While the Bank of England has begun easing policy, officials stressed that monetary conditions remain restrictive. The central bank said further adjustments would depend on incoming data, particularly on services inflation, wage trends, and inflation expectations.

The Bank of England also noted that UK inflation remains higher than in several other G7 economies, reinforcing the need for a measured approach. Policymakers signaled that rate cuts will proceed gradually to avoid reigniting inflationary pressures.

Most economists expect one additional rate cut by spring 2026, assuming current disinflation trends continue.

Market Reaction to the Decision

Markets responded cautiously to the Bank of England decision. Sterling weakened slightly against the US dollar, while UK government bond yields fell, reflecting expectations of further easing next year.

UK equities posted modest gains, particularly in rate-sensitive sectors such as housing, construction, and retail. Analysts described the move by the Bank of England as a careful recalibration rather than a sharp policy pivot.

Balancing Growth and Inflation Risks

The latest move by the Bank of England underscores the central bank’s delicate balancing act. With inflation easing but growth faltering, policymakers are attempting to support the economy without undoing progress on price stability.

As the UK navigates a fragile recovery, future decisions by the Bank of England will remain tightly linked to economic data and inflation dynamics.