Bank of England cuts interest rates to 3.75%

The Bank of England cut the cost of borrowing on Thursday, as widely expected, on the back of better-than-expected inflation data.

In a close vote, the rate-setting Monetary Policy Committee agreed to trim the cost of borrowing by 25 basis points to 3.75%, the lowest level since February 2023.

Four members – including chief economist Huw Pill – voted to maintain Bank Rate at 4%, while five backed the reduction, including governor Andrew Bailey.

It is the fourth cut this year, and the sixth in the current rate-reducing cycle.

However, the MPC maintained a cautious outlook.

It argued that, “on the basis of the current evidence, Bank Rate is likely to continue on a gradual downward path. But judgements around further policy easing will become a closer call.”

The BoE has long adopted a cautious approach to loosening monetary policy in the face of persistently sticky inflation, especially in food and services.

However, data earlier this week showed the consumer prices index had fallen by more than expected in November, to 3.2%.

Services and food inflation were also lower, with the latter dropping to 4.2% from 4.9%.

The MPC expects inflation to near its 2% target around the second quarter of 2026.

Explaining his vote, Bailey said: “The key question for me now is the extent to which inflation settles at the 2% target in an enduring way.

“Slack has continued to accumulate in the economy.

“On the other hand, inflation expectations have not yet shifted downward sufficiently following the past few years of persistent above-target inflation.

“While I see scope for some additional policy easing, the path for Bank Rate cannot be pre-judged with precision.”

In contrast, Pill said he continued to believe that the risk of inflation stabilising above target was greater than the risk of inflation undershooting due to weakening demand.

“Underlying inflationary pressures are stronger than expected a year ago,” he argued.

Neil Wilson, UK investor strategist at Saxo Markets, said: “The hawks’ view seems to be that high-ish forward-looking wage growth indicators mean inflation could be stickier than the doves assume.

“But this is hard to reconcile with downward momentum in forward inflation indicators and rising unemployment.

“The hawks have got this wrong.”

Emma Wall, chief investment strategist at Hargreaves Lansdown, said: “The MPC has cut rates...in a move that surprised no one. What has surprised markets, however, is how tight the vote was, making the path from here less certain.”