LONDON — The Bank of England (BoE) on Thursday lowered its benchmark interest rate to 3.75% from 4.0% after a narrow 5-4 vote by the Monetary Policy Committee (MPC). The move marks the fourth rate reduction this year but comes with a warning that further cuts could be limited as policymakers weigh the risks of persistent inflation.
Read More: Bank of England cuts interest rate to 3.75%
Governor Andrew Bailey, who shifted his view to support a reduction, said rates are “on a gradual path downward” but added that the scope for additional cuts is now “a closer call.” The committee’s dissenting members expressed concern that inflation, still the highest among Group of Seven economies, may remain stubbornly high despite recent declines.
The Bank of England cut interest rates to 3.75%, the lowest level in almost three years@lizzzburden explains what the knife edge vote signals for 2026 https://t.co/P684I3ke6u pic.twitter.com/ovWK64VPxS
— Bloomberg (@business) December 18, 2025
Data this week showed a sharp drop in inflation to 3.2% and a stagnating economy, with zero growth expected in the final quarter of 2025. Job market indicators have also weakened, including slower private sector pay growth and the highest unemployment rate since 2021. The BoE noted that underlying growth remains modest at around 0.2% per quarter.
Deputy Governor Clare Lombardelli and Chief Economist Huw Pill highlighted the risk that inflation could stay elevated, signaling a cautious approach to future cuts. The central bank said the chance of demand falling too low is also a factor, meaning interest rates will be adjusted carefully.
The BoE’s decision contrasts with other major central banks, as the U.S. Federal Reserve signals only one more cut next year while the European Central Bank appears to have concluded its easing cycle. The BoE forecast that Britain’s budget measures could reduce inflation in 2026 by about half a percentage point, with only minimal impact on economic growth.
Read More: Bank of England warns UK faces two-year recession, hikes rate
Policymakers stressed that while the latest quarter-point cut takes rates to their lowest level in nearly three years, inflation risks and uneven growth require a measured approach moving forward.