Bank of England cuts interest rates to near three-year low

The Bank of England has cut interest rates to the lowest level in nearly three years, as it said measures in the Budget will help bring down inflation quicker than previously thought.

The Bank’s Monetary Policy Committee (MPC) voted to reduce rates from 4% to 3.75%.

Governor Andrew Bailey said the UK has “passed the recent peak in inflation and it has continued to fall”, allowing the MPC to cut borrowing costs for the fourth time this year.

It takes the bank’s base interest rate to its lowest level since early 2023.

The nine-person committee voted five-to-four for a cut, with Mr Bailey among those preferring to lower rates at the Bank’s final meeting of the year.

The decision comes after official figures showed Consumer Prices Index (CPI) inflation fell sharply to 3.2% in November, from 3.6% in October.

Minutes of the MPC’s meeting read: “This was above the 2% target but, following the Budget announcements on administered prices and indirect taxes, headline inflation was now expected to fall back more quickly in April, to closer to 2%.”

It means CPI will near the Bank’s target level considerably earlier than the early 2027 timeframe that it had forecast in November.

Measures in the autumn Budget, delivered by Chancellor Rachel Reeves last month, are likely to lower CPI inflation by around 0.5 percentage points, according to the MPC.

This includes one-off support for household energy bills and freezing fuel duty which will kick in from April next year.

“We still think rates are on a gradual path downward,” Mr Bailey said.

“But with every cut we make, how much further we go becomes a closer call.”

Meanwhile, the MPC said it was expecting the economy to show no growth over the final quarter of 2025.

This comes after official data showed a 0.1% contraction in October, which was weaker than it had been expecting.

Meagre economic growth as well as a weakening jobs market and slower pay growth pointed to underlying inflation pressures reducing, the Bank said.

However, the four MPC members who voted to keep interest rates unchanged were more concerned about prolonged inflation persistence, particularly within the services sector and among wage growth.