BoE Cuts Rates to 3.75% as Inflation Cools and Growth Weakens

The Bank of England (BoE) cut its benchmark interest rate on Thursday, as widely expected, responding to a sharp deceleration in inflation and mounting signs of economic weakness across the U.K. economy.

The central bank lowered the Bank Rate by 25 basis points to 3.75% from 4.0%, marking the fourth rate cut this year and taking borrowing costs to their lowest level in nearly three years. The BoE last reduced rates in August.

Split vote highlights cautious easing path

The decision was not unanimous. Five of the nine members of the Monetary Policy Committee (MPC) voted in favor of the cut, while four preferred to keep rates unchanged, underscoring lingering concerns over inflation persistence. This marked a shift from the previous meeting, when policymakers narrowly voted 5–4 to hold rates steady.

Inflation slowdown clears the way for easing

The policy move followed a notable improvement in inflation dynamics. Data released earlier this week showed U.K. consumer price inflation fell to 3.2% in November, down from 3.6% in October, marking its lowest level since March.

Despite the improvement, inflation remains well above the BoE’s 2% target and is still the highest among G7 economies, keeping policymakers cautious about committing to an aggressive easing cycle.

Weak growth and labor market strain add pressure

Beyond inflation, the broader economic backdrop has deteriorated. Recent data pointed to:

• The highest unemployment rate since 2021
• A 0.1% contraction in GDP in the three months to October
• Signs that businesses delayed investment decisions ahead of the Autumn budget, reflecting uncertainty over fiscal policy and demand conditions

These factors strengthened the case for easing monetary conditions to support activity.

Markets see limited room for further cuts

Market pricing suggests investors expect only one additional BoE rate cut in 2026, most likely by late April, though expectations for a second cut increased slightly after the latest inflation data.

Overall, Thursday’s decision signals that while the BoE has begun to ease policy, it remains highly data-dependent, balancing a cooling economy against inflation that is still uncomfortably elevated.