Interest rates cut to 3.75%, but more cuts are ‘closer’

Interest rates have been cut to 3.75%, the lowest level in almost three years, but further reductions are expected to be “closer”, the Bank of England has said.

In a closely contested vote, officials voted 5-4 to cut rates from 4%, reflecting concerns about rising unemployment and weak economic growth.

The Bank said rates were likely to “continue on a gradual downward trajectory” but warned that judgments about further cuts next year would be more controversial.

Inflation is now expected to fall “closer to 2%” – the Bank’s target – next year, which is ahead of previous forecasts. However, the economy is expected to experience zero growth in the final months of this year.

The decision to cut borrowing costs from 4% was widely expected, after figures this week showed inflation, as rates rise, slowed further to 3.2% in the year to November.

“We continue to think rates are on a gradual downward path, but with every cut we make, how much further we go becomes a closer decision,” Bank Governor Andrew Bailey said.

He later told broadcasters there was “good news” that inflation was “coming down a little faster than we thought” after “a blip” this year.

However, the governor was not interested in the timing of further interest rate cuts.

While the cut is likely to be good news for people looking to borrow money or get a mortgage, savers could see a reduction in their returns.

Around 500,000 homeowners have a mortgage that “tracks” the Bank of England rate, and Thursday’s cut is likely to mean a typical £29 reduction in monthly payments.

Homeowners with standard variable rates are also likely to see lower payments, although the vast majority of mortgage customers are on fixed rate deals so are not immediately affected by the latest decision.

Kayleigh Taylor told the BBC she was expecting a cut as her mortgage payments had increased by £1,000 a month when she previously remortgaged.

“When we bought the property we are in now, due to circumstances we had to lock it up for only a year. Then we were forced to remortgage and it was at the worst time,” he said.

The family are due to remortgage next year but could look to move from their current home in Billericay, Essex, to a larger property if rates continue to fall.

“We’re in limbo as to whether we should remortgage and stay where we are, or in an ideal world we’d look to move somewhere more rural and a slightly less urbanized area,” he said.

The Bank said that, following the fiscal and spending policies announced in last month’s Budget and the easing of oil and gas prices, inflation was likely to fall to around 2% in the spring/summer of next year. Previously I did not expect this to happen until 2027.

Chancellor Rachel Reeves announced the Government would cut £150 from household energy bills in the Budget, as well as freezing taxes on fuel, prescriptions and rail fares.

However, the Bank said weaker economic growth in November had led it to expect zero growth for the final months of this year.

The government has made growing the economy its top priority as part of its efforts to improve living standards.

The Bank said data collected from businesses across the country suggested a “lackluster economy”, and that businesses were worried about speculation ahead of the Budget.

He said consumers remained “cautious and very focused on value for money”, adding that grocery stores were “smaller than usual”.

“Some supermarkets are concerned that the budget will curb spending on Christmas food and drink, but discounters say early sales of discounted seasonal food are strong so far,” he added.

The Christmas period is the main money-making time of year for restaurants and bars, but the Bank said hospitality firms were trying to reduce spending and “contain price rises as far as possible, given fragile demand and growing affordability concerns for consumers”.

The latest figures showed that food prices were the main factor behind the fall in inflation in November.

Bailey said he was “particularly pleased” that food price inflation had eased.

“We’ve had some real challenges in recent years with some very big shocks to the global economy. I’m certainly very encouraged because I think we’re seeing progress,” he said.

Ruth Gregory, deputy chief UK economist at Capital Economics, said that with inflation set to fall more than the Bank expected, analysts believed a rate cut in February was possible.

He added that it was also possible that “rates could fall to 3% in 2026 instead of the minimum 3.5% currently priced into the market.”

Reacting to the Bank’s decision, the Chancellor said it was the “sixth interest rate cut since the election; it is the fastest pace of cuts in 17 years, good news for families with mortgages and businesses with loans.”

But shadow chancellor Mel Stride said that while lower interest rates would be “good news for many families”, the cut reflected “growing concerns about the weakness of our economy”.

“Rachel Reeves’ economic mismanagement has left the Bank of England facing an impossible dilemma: balancing high inflation with a fragile economy.”

The Bank, which is independent of the government, sets interest rates in an attempt to keep consumer price increases in check.

The theory behind raising interest rates to combat inflation is that by making borrowing more expensive, more people will cut back on spending and that leads to demand for goods falling and price increases attenuating.

But it’s a balancing act, as high interest rates can harm the economy as companies refrain from investing in production and employment.

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