In a final monetary policy decision for 2025, the Bank of England (BOE) provided a measure of holiday relief to borrowers, voting narrowly to lower interest rates on Thursday.
The central bank’s Monetary Policy Committee (MPC) was divided in a 5-4 vote, ultimately deciding to reduce the benchmark interest rate by 25 basis points, bringing it down to 3.75%. This represents the fourth rate reduction of the year.
The Economic Rationale
The decision was widely anticipated by economists, driven by a trifecta of economic indicators:
- A softening labor market.
- Lackluster economic growth.
- A faster-than-expected decline in inflation.
Despite these indicators, the decision was contentious. Governor Andrew Bailey aligned with the committee’s “dovish” members to push the cut through. Opposing them were four policymakers who argued against easing, citing that November’s inflation rate of 3.2% remains stubbornly above the BOE’s official 2% target.
In its accompanying statement, the MPC acknowledged that while inflation is currently above target, it is projected to return to the 2% goal “more quickly in the near term.” However, the committee adopted a cautious tone regarding the future, noting that “judgements around further policy easing will become a closer call” and will remain strictly data-dependent.
Market and Political Reaction
Following the announcement, financial markets remained relatively calm:
- Currency: Sterling was flat against the dollar.
- Stocks: The FTSE 100 remained unchanged.
- Bonds: The yield on the benchmark 10-year U.K. gilt rose slightly by 3 basis points to 4.510%.
Politically, the move was warmly received by the government. Chancellor Rachel Reeves championed the decision as a win for households facing cost-of-living challenges.
“Today’s interest rate cut is the sixth since the election [in July 2024], the fastest pace of cuts in 17 years and good news for families with mortgages and businesses with loans,” Reeves stated on X, while conceding that more work remains to be done.
While borrowers and mortgage holders will welcome the cheaper cost of debt, the cut serves as another blow to savers, who will see diminishing returns on their deposits.
Outlook: What to Expect in 2026
Looking ahead, the BOE forecasts the economy will flatline with zero growth in the fourth quarter of 2025. This stagnation may force the bank’s hand regarding future cuts, though experts warn the path forward is not guaranteed.
Major financial institutions offered varied forecasts for early 2026:
- Barclays: U.K. Chief Economist Jack Meaning told CNBC that while the downgrade in growth and inflation necessitates acknowledgement of future cuts, the BOE is “keeping their options open,” and we may not see “many more from here.”
- JPMorgan: Chief U.K. Economist Allan Monks predicts a base case of two additional cuts in March and June 2026, which would lower the rate to 3.25%. However, he warned that “high-side wage expectations” remain a “fly in the ointment” that could delay easing. Conversely, if wage data softens, a cut could come as early as February.
- Morgan Stanley: Economists Bruna Skarica and Fabio Bassanin are more optimistic about an earlier timeline, forecasting a cut in February driven by rising unemployment and falling price pressures. They currently anticipate two additional cuts in the first half of 2026 (April and June).
