Bank of England Cuts Rates to 3.75%

The Bank of England cut its benchmark interest rate by a quarter point to 3.75% on Thursday, marking its fourth reduction of 2025, but a sharply divided vote underscored growing unease among policymakers over inflation risks and a fragile economic outlook.

The decision passed by a narrow 5–4 margin on the Monetary Policy Committee, with Governor Andrew Bailey casting the decisive vote after shifting his stance in favor of the cut. The close split immediately tempered market expectations of an accelerated easing cycle.

Bailey moved quickly to rein in speculation, stressing that while interest rates remain on a “gradual downward path,” each additional cut makes the next decision more complex. He warned that there is still no clear evidence of a sharp deterioration in the labor market and that inflation expectations have not fallen far enough to justify aggressive easing.

The rate cut followed data showing a sharper-than-expected drop in inflation this week, with headline inflation falling to 3.2%. Despite the decline, inflation remains the highest among G7 economies, an uncomfortable reality that kept four policymakers firmly opposed to any rate reduction.

Deputy Governor Clare Lombardelli voiced concern that inflation could settle at levels higher than currently forecast, arguing that the latest improvement may amount to little more than a marginal retreat. Chief Economist Huw Pill echoed that caution, saying the risk of inflation remaining elevated still outweighs the danger of it falling too far.

The Bank nevertheless acknowledged that inflation is now expected to move closer to its target more quickly in the near term, with reduced, though not eliminated, risks of prolonged price pressures. At the same time, officials noted lingering concerns about weakening demand.

Economic conditions weighed heavily on the decision. The Bank of England downgraded its growth forecast, now expecting zero growth in the final quarter of 2025, down from a 0.3% estimate made just a month earlier. While policymakers believe underlying growth potential is slightly stronger, at around 0.2% per quarter, the broader picture remains fragile.

Recent data point to the weakest labor market since 2021, with unemployment rising and private-sector wage growth slowing. The UK economy contracted by 0.1% in the three months to October, amid signs that companies have frozen investment plans ahead of the government’s November budget.

Even after the cut, UK interest rates remain nearly double those of the European Central Bank, which is widely seen as having reached the end of its easing cycle. In the United States, the Federal Reserve has signaled only one additional rate cut in 2026.

The Bank of England also highlighted the role of fiscal policy, estimating that the government’s budget will reduce inflation by around half a percentage point in 2026 through temporary measures, before exerting upward pressure later on. Its impact on growth, however, is expected to be modest, adding no more than 0.2 percentage points in 2026 and 2027.