London — The Bank of England (BoE) has cut interest rates to 3.75%, the lowest level in almost three years, following a sharper-than-expected drop in inflation. The Monetary Policy Committee (MPC) voted by a majority of 5-4 to reduce the Bank Rate by 0.25 percentage points. This decision marks the fourth cut to monetary policy since the beginning of 2025.
The central bank's move comes in response to the latest data from the Office for National Statistics (ONS), which revealed that the Consumer Price Index (CPI) measure of inflation slowed to 3.2% in the 12 months to November, down from 3.6% in October. The drop in inflation was larger than economists and the Bank of England had anticipated. The last time rates were this low was at the beginning of February 2023.
The primary driver of the fall in inflation was lower food prices, with prices rising less quickly for items like cakes, biscuits, and breakfast cereals. The ONS also noted a decrease in the annual rate of the CPIH all-services index, which fell to 4.5% in November, down from 4.6% the previous month.
The Bank of England's decision to cut interest rates reflects concerns about a weakening job market and the need to stimulate the UK economy. The MPC's primary objective is to combat economic shortfalls and reduce inflation. According to the Bank, further rate cuts will depend on the outlook for inflation. The BoE expects inflation to fall back to the 2% target in 2026, rather than in 2027.
The cut in interest rates was widely anticipated by financial markets, with futures markets predicting a near 100% chance of a 25 basis point cut. Following the announcement, market betting on the likelihood of a rate cut rose past 95%. The decision was also influenced by the US Federal Reserve's recent cut to interest rates.
The Bank's Monetary Policy Committee has been cautious in recent months, fearing that the predicted short-term "hump" in inflation this year could become a longer-term phenomenon, as wage growth remained stubbornly high. The committee members also considered that the restrictiveness of policy has fallen as the bank rate has been reduced by 150 basis points since August 2024.
The decision to cut rates was not unanimous, with the MPC voting 5-4 in favor of the reduction. This split decision highlights the ongoing debate within the bank about the best course of action to manage inflation and support economic growth. Andrew Bailey, governor of the BoE, indicated that future bank rate decreases are expected to be gradual, contingent on continued easing of pay growth and services inflation.
Experts predict there will be two more rate cuts in February and April of 2026. The central bank will likely make their next monetary policy decision in early February.
