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The Bank of England has capped off 2025 with another interest rate cut, lowering its benchmark Bank Rate from 4% to 3.75% in a closely contested decision that reflects a fragile economy and easing inflation pressures. The move, widely anticipated by markets, marks the fourth reduction this year and signals a cautious shift toward supporting growth as the U.K. heads into 2026.

The central bank’s nine member Monetary Policy Committee voted 5–4 in favor of the 25 basis point cut, underlining deep divisions over how quickly inflation risks are receding. Governor Andrew Bailey sided with the more dovish members, while four policymakers argued that price pressures remain too elevated to justify faster easing.

Economic backdrop drives the decision
The rate cut comes against a backdrop of subdued economic momentum. Recent data point to a softening labor market, weaker consumer demand, and slowing business investment. The Bank now expects the U.K. economy to show zero growth in the fourth quarter of 2025, reinforcing concerns that high borrowing costs could further restrain activity.

Inflation has cooled faster than previously forecast, falling to 3.2% in November. While still above the Bank’s 2% target, policymakers acknowledged that price growth is now expected to return toward target more quickly in the near term. In its statement, the MPC emphasized that future decisions will remain data dependent, particularly around wages, services inflation, and labor market tightness.

“The Bank Rate is likely to continue on a gradual downward path,” the committee said, while cautioning that decisions on further easing will become increasingly finely balanced.

Market reaction remains muted
Financial markets reacted calmly to the announcement, suggesting the move was largely priced in. Sterling was little changed against the U.S. dollar, the FTSE 100 finished broadly flat, and yields on 10 year U.K. government bonds edged up to around 4.51%, reflecting lingering uncertainty about the pace of future cuts.

For households and businesses, the immediate impact is more tangible. Mortgage holders on variable rates and firms reliant on bank lending are set to benefit from lower borrowing costs, offering some relief after years of elevated interest rates. At the same time, savers are likely to see weaker returns, continuing the trade off that typically accompanies monetary easing.

Political response and cost of living pressures
Chancellor Rachel Reeves welcomed the decision, framing it as positive news for families and companies still grappling with high living costs. She noted that the latest move represents the sixth rate cut since the July 2024 election and the fastest easing cycle in nearly two decades.

Despite the supportive tone, policymakers and politicians alike acknowledge that lower rates alone will not resolve deeper structural challenges facing the U.K. economy, including weak productivity growth and persistent pressure on household finances.

What comes next in 2026
Looking ahead, economists broadly expect further rate cuts in 2026, though opinions differ on timing and scale. Many see early next year as the next realistic window, assuming inflation continues to trend lower and labor market conditions soften further.

Some forecasts point to two additional cuts in the first half of 2026, potentially taking the Bank Rate to around 3.25% by midyear. Others are more cautious, warning that elevated wage growth and sticky services inflation could slow the pace of easing and force the Bank to pause between moves.

The Bank of England itself struck a careful tone, stressing flexibility over forward guidance. While the direction of travel appears set, officials remain wary of moving too quickly and reigniting inflationary pressures just as they appear to be coming under control.

As 2025 draws to a close, the latest rate cut offers a modest boost to confidence, but it also underscores the delicate balancing act facing policymakers as they steer the economy through a slow recovery and into an uncertain 2026.