Highlights
- BoE reduces benchmark rate by 0.25 percentage points in tight 5-4 vote split.
- Governor Andrew Bailey warns future cuts will be "closer call" with each reduction.
- Sterling rises and gilt yields increase as markets react to cautious tone.
The Bank of England cut interest rates to 3.75 per cent on Thursday following a narrow vote by policymakers but signalled the gradual pace of lowering borrowing costs might slow further.
Five Monetary Policy Committee members voted to reduce the benchmark rate by 0.25 percentage points from 4 per cent, marking the fourth cut in 2025. Four members opposed the move, concerned about inflation remaining too high despite recent falls.
Governor Andrew Bailey, who changed his view to support the cut and tip the balance, told Reuters "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."
The decision came after inflation unexpectedly dropped to 3.2 per cent on Wednesday and new forecasts showed the economy stagnating in late 2025.
The BoE now expects zero economic growth in the last three months of 2025, down from a 0.3 per cent forecast made last month.
Markets and outlook
Sterling rose nearly half a cent against the US dollar following the announcement, while two-year gilt yields climbed 6 basis points to 3.77 per cent as investors reacted to the cautious tone about future rate cuts.
British inflation remains the highest among Group of Seven economies, partly due to finance minister Rachel Reeves' decision to raise employer taxes in her November budget.
However, the BoE said inflation was "now expected to fall back towards target more quickly in the near term."
Deputy governor Clare Lombardelli, who voted against the cut, noted that she remained concerned about inflation proving stronger than expected.
Chief economist Huw Pill noted that he saw a bigger risk of inflation getting stuck too high than too low.
The quarter-point reduction brings Bank Rate to its lowest level in nearly three years, though it remains almost double the European Central Bank's equivalent rate.
Recent economic data revealed a weakening jobs market, with Tuesday's figures showing the highest unemployment rate since 2021 and slowing private-sector pay growth.
Britain's economy also shrank by 0.1per cent in the three months to October, with businesses reportedly putting investment projects on hold ahead of Reeves' budget.
Yael Selfin, chief economist at KPMG UK, said the deep split among MPC members suggested consensus would be difficult next year.
"As a result, we expect only two interest rate cuts in 2026, taking rates down to 3.25 per cent," she told Reuters.
