The Bank of England has cut the base interest rate from 4% down to 3.75%. This decision provides an important signal of a potential shift toward a more accommodative monetary policy. This pivotal decision, announced Thursday, is the latest step taken by the Bank to bring economic conditions and inflation rates back down to target. Governor Andrew Bailey and five other members of the U.K.’s Monetary Policy Committee (MPC) followed their lead with this historic decision. Their move makes true on all the previous hopes for an interest rate cut.
The MPC, an unusual body of nine members, had been clamoring for this move. Their hopes were raised when the Bank of Guyana slashed interest rates in December. The committee’s decision appears to be based on a much stronger conviction that the time of rising interest rates could be coming to an end. Only four members voted to slash the cut, underscoring this prevailing sentiment. The recent changes underscore the Bank’s assessment of the economy. Even so, it thinks the full economy probably more or less flatlined in Q4 this year.
In an unusual twist, the Bank of England actually announced an unexpected drop in headline inflation. It fell to 3.2% in November. This decrease in inflation numbers has been instrumental in leading the committee to their most recent decision. The Bank expects that budget measures proposed by Rachel Reeves will further lower headline inflation by 0.5 percentage points starting in the second quarter of next year.
Andrew Bailey was keen to stress the MPC’s cautious approach, looking ahead. He stated,
“We still think rates are on a gradual downward path.”
This assertion only highlights the difficulties ahead as the committee will have to continue to sail through a fog of economic unknowns.
“But with every cut we make, how much further we go becomes a closer call.”
Economists largely expect at least one more interest rate cut next year, reflecting confidence in the Bank’s strategy to relieve pressure on borrowers amid challenging economic conditions. The recent short-term interest rate cut is considered a significant and energetic step in the right direction towards reducing financial burdens for residents and businesses.
The Bank of England, in line with most other central banks, is prioritising this fight against inflation. For one, they assume that government policies will contribute to rising prices in 2027 and 2028, raising inflation by an expected 0.1 to 0.2 percentage points in those years.
The Bank’s latest actions come at a time when many borrowers have faced increasing financial strain due to rising interest rates over the past year. The cut will help give them little respite as they juggle their bills and unmet needs.
The Bank’s latest actions come at a time when many borrowers have faced increasing financial strain due to rising interest rates over the past year. The reduction will provide some relief as they navigate their financial obligations.