The Bank of England has voted to cut the base interest rate by 0.25 percentage points, bringing Bank Rate down to 3.75%. The decision reflects growing confidence that inflationary pressures are easing, though policymakers remain cautious about how quickly rates can fall further.

The Monetary Policy Committee (MPC), which meets eight times a year to set interest rates with the aim of keeping inflation close to its 2% target, noted that inflation has continued to decline. Having peaked at over 10% three years ago, inflation now stands at 3.2% in the latest data.

This marks the sixth interest rate cut since August 2024, underlining a clear shift away from the prolonged period of tight monetary policy.

Why the Bank Cut Rates

In its statement, the Bank said falling inflation has created scope to reduce rates, but stressed that future cuts are far from guaranteed. While interest rates are expected to move on a “gradual downward path”, each decision will be finely balanced.

The MPC highlighted ongoing risks, particularly around pay growth and services inflation, which remain key indicators of whether inflation will continue to fall sustainably back to target.

In short, while the direction of travel is downwards, the pace will depend heavily on incoming data.

What This Means for Households and Businesses

For households, today’s cut will offer some relief, particularly for those on variable-rate mortgages or approaching the end of fixed deals. However, borrowing costs remain significantly higher than the ultra-low levels seen earlier in the decade, and lenders are unlikely to pass on the full benefit immediately.

Businesses may welcome the move as a modest boost to confidence. Lower rates can ease pressure on borrowing costs and support investment, but many firms are still navigating higher wage bills and subdued consumer demand.

Savings rates, meanwhile, are likely to continue edging down as banks adjust to the lower base rate, reducing returns for savers.

How Far Could Rates Fall?

The Bank was clear that while further cuts are likely, “how much further we go becomes a closer call” with each reduction. Policymakers remain focused on ensuring inflation not only returns to 2%, but stays there.

Any signs that inflation is becoming sticky, particularly in services or wage growth, could slow or pause the pace of cuts. As a result, future decisions are likely to remain data-dependent rather than pre-committed.

What to Expect Next

Today’s decision reinforces the message that the era of steadily falling rates has begun, but it will not be a straight line. The Bank is attempting to balance supporting economic growth while avoiding a resurgence of inflation.

For households and businesses alike, the key takeaway is that relief is arriving gradually, not all at once. Borrowing costs should continue to ease over time, but expectations of rapid or aggressive cuts are likely to be disappointed.

Key Date

Next Bank of England Rate Decision: 18 December 2025

Categories: Insights