On December 18, 2025, the Bank of England delivered a widely anticipated but closely contested decision: a quarter-point cut in its key interest rate, lowering it from 4% to 3.75%. This marks the lowest level for the UK’s base rate since February 2023 and comes as a pre-Christmas boost to households and businesses grappling with persistent economic headwinds. But beneath the headline, the move reveals deep divisions among policymakers and underscores the delicate balancing act facing the UK’s central bankers as they navigate a landscape of easing inflation, a weakening labor market, and ongoing concerns about economic stagnation.
The decision, made by a narrow 5-4 vote of the Bank’s nine-member Monetary Policy Committee (MPC), was the fourth rate cut of 2025 and the sixth since August 2024, according to Reuters and BBC. The vote split highlights the uncertainty within the Bank about the best path forward, with some members worried that inflation, though falling, remains stubbornly above the Bank’s official 2% target. Others, meanwhile, are more concerned about the risks of weak growth and rising unemployment.
Recent data provided the backdrop for the MPC’s debate. The UK’s annual inflation rate slowed to 3.2% in November, down from 3.6% in October and lower than the Bank’s own forecast of 3.4%, as reported by BBC and The Guardian. The drop was driven in part by weaker food prices and was welcomed as a sign that the worst of Britain’s inflation “hump” may have passed. Still, as Reuters noted, inflation in the UK remains higher than in peer economies: the eurozone’s rate held steady at 2.1%, and the US rate was 3.0% in September, the latest available figure.
But the inflation picture is only part of the story. The Bank’s move also comes amid signs of a softening labor market and sluggish growth. The unemployment rate has risen to 5.1%, its highest since January 2021, while the number of job vacancies has declined. The UK economy shrank by 0.1% in the three months to October and is expected to stagnate in the final quarter of 2025, according to the Bank’s own forecasts. “GDP is now expected to be flat in the final three months of 2025, after a 0.1% expansion in the third quarter,” the MPC said in its meeting minutes, as reported by The Guardian.
For many, the rate cut is a welcome relief. Lower interest rates reduce borrowing costs, making it cheaper for consumers to spend and for businesses to invest. Chancellor Rachel Reeves cheered the move, stating, “This is the sixth interest rate cut since the election – that’s the fastest pace of cuts in 17 years, good news for families with mortgages and businesses with loans. But I know there’s more to do to help families with the cost of living.” Reeves’s November 2025 budget included inflation-fighting measures such as cuts to household energy bills, which the Bank expects will reduce inflation by about half a percentage point in the first quarter of 2026.
However, the MPC’s split reveals lingering anxiety about the persistence of inflation, particularly in the services sector and in wage growth. Four committee members voted to keep rates on hold, citing concerns that inflation had become entrenched due to “lasting changes in wage and price-setting behaviour.” Chief Economist Clare Lombardelli, one of the holdouts, highlighted “elevated wage growth,” which she suggested could “require slowing the pace of future policy easing.” The Bank’s regional agents reported that employers expect pay growth of 3.5% in 2026—a figure that could keep inflation above target if not offset by other factors.
Governor Andrew Bailey, who cast his vote with the majority in favor of the cut, nonetheless emphasized caution. “We’ve passed the recent peak in inflation and it has continued to fall, so we have cut interest rates for the sixth time, to 3.75% today. We still think rates are on a gradual path downward. But with every cut we make, how much further we go becomes a closer call,” Bailey said, according to The Guardian and Reuters. He added that he expects inflation to return close to the 2% target as soon as April or May 2026, about a year earlier than previously forecast, but warned that “the calls will become closer, and I would expect the pace of cuts, therefore, to ease off at some point.”
Market reaction to the announcement was muted but telling. Sterling initially strengthened against the US dollar before paring its gains, and the yield on the benchmark 10-year UK gilt rose slightly, reflecting investors’ recalibrated expectations for the pace of future rate cuts. As Reuters pointed out, interest-rate-sensitive two-year gilt yields rose as much as 6 basis points as investors saw slightly less chance of more than one rate cut next year.
Economists remain divided on what comes next. Some, like Sanjay Raja of Deutsche Bank, are sticking to forecasts of two more quarter-point cuts in 2026—possibly in March and June—while others caution that the Bank may move more slowly if wage growth or inflation proves stickier than expected. “We will see cuts but perhaps not many more from here,” Jack Meaning, UK chief economist at Barclays, told CNBC. “They have to acknowledge that there are probably more cuts coming, but they’re keeping their options open.”
The Bank’s November 26 budget, which included a £25 billion increase in employer national insurance contributions, has also played a role in shaping the inflation and growth outlook. The MPC acknowledged that the NICs rise was among the “one-off shocks” that had “restrained” the downward trend in inflation in recent months. Business groups have blamed the increase, along with budget uncertainty, for putting the brakes on investment and growth.
Independent forecasters, including the International Monetary Fund, have suggested UK consumers are likely to face the highest inflation rates among G7 economies this year and next. The Bank, for its part, expects inflation to continue trending lower, nearing the 2% target by mid-2026, but warns that the path ahead is far from certain. As Bailey and other policymakers have made clear, each future rate decision will be a “closer call,” with risks on both sides of the inflation-growth equation.
For now, the Bank’s next meeting to consider interest rates is scheduled for February 5, 2026. All eyes will be on fresh data for hints of whether policymakers will feel emboldened to cut again—or whether caution will prevail as the UK charts its course through a period of historic economic uncertainty.
