Interest rates reduced to near three-year low but further cuts a ‘closer call’

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.

“We still think rates are on a gradual path downward,” he added.

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

Economists think the pace of interest rate cuts will slow next year as the Bank gets closer to what it deems a “neutral” rate and inflation nears its 2% target level.

The latest reduction 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.

Matt Swannell, chief economic adviser to the EY Item Club, noted that “for the first time, the committee indicated that it was getting close to the end of its cutting cycle”.

“With some of the doves still having one eye on lingering inflation, it seems that most of the MPC are in no rush to deliver the next cut,” he said.

He said the “most likely scenario” was that the next cut would come in April.

Yael Selfin, chief economist at KPMG UK, said: “In 2026, the pace of cuts is expected to slow as interest rates approach the Bank’s estimate of the neutral rate.

“The MPC has signalled that the scope for further cuts is narrowing, describing policy as becoming less restrictive.”

He added that there was “significant division within the MPC regarding the balance of risks to the inflation outlook”.

“As a result, we expect only two interest rate cuts in 2026, taking rates down to 3.25%.”

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.