A closely split decision to ease policy
The Bank of England delivered its final monetary policy decision of 2025 with a narrowly approved interest rate cut. The nine-member Monetary Policy Committee voted 5–4 to reduce the benchmark rate by 25 basis points to 3.75%, marking the fourth cut of the year and closing a period of gradual policy easing.
While the move was broadly anticipated by markets, the tight margin highlighted ongoing divisions within the committee. Governor Andrew Bailey sided with the more dovish members, while four policymakers opposed the cut, citing concerns that inflation remains elevated at 3.2%, still well above the central bank’s 2% target.
Inflation outlook improves, but caution remains
In its statement, the MPC acknowledged that inflation is still above target but said it is now expected to return toward the 2% goal more quickly than previously anticipated. At the same time, the committee emphasized that any additional easing will depend heavily on how inflation and wage pressures evolve in the months ahead.
The Bank signaled that interest rates are likely to continue moving lower over time, but stressed that future decisions will be finely balanced. Policymakers warned that further cuts are not automatic and will require confirmation that price stability risks are diminishing.
Market reaction and political response
Financial markets showed a muted response to the decision. The pound traded flat against the U.S. dollar, the FTSE 100 remained unchanged, and yields on the 10-year U.K. government bond edged higher to 4.51%. For households and businesses, the rate cut offers some relief through cheaper borrowing, though savers face lower returns.
Chancellor Rachel Reeves welcomed the move, describing it as positive news for mortgage holders and companies with outstanding loans. She noted that the pace of easing since mid-2024 represents the fastest cycle of cuts in nearly two decades, while acknowledging that cost-of-living pressures remain a challenge.
Looking ahead to 2026
The central bank expects the U.K. economy to show no growth in the final quarter of 2025, keeping the door open for additional easing next year. Several major banks anticipate further rate cuts in early 2026 if inflation continues to cool and labor market conditions weaken.
However, economists caution that strong wage expectations could limit how far and how fast rates fall. While more cuts appear likely, the Bank of England is expected to maintain a careful tone, balancing the need to support growth against the risk of reigniting inflation.
