The Bank of England has delivered a pre-Christmas boost to borrowers, cutting interest rates for the sixth consecutive time. The Monetary Policy Committee (MPC) voted to lower the base rate from 4% to 3.75%, but deep divisions have emerged over how much further it can fall.
A Divided Committee on the Path Forward
While the decision was widely anticipated following data showing inflation slowed to 3.2% in November, the nine-member panel was split. Five members, including Governor Andrew Bailey, backed the cut. However, the remaining four dissented, believing the endpoint for rate reductions may already have been reached.
Governor Bailey acknowledged the tightening path ahead, stating: "We still think rates are on a gradual downward path. But with every cut we make, how much further we go becomes a closer call." The division centres on conflicting views of the UK's inflation prospects amidst a stagnating economy and rising unemployment.
Economic Weakness Versus Stubborn Wage Pressures
The case for further easing is supported by a bleak economic outlook. The Bank believes growth likely flatlined in the final quarter of the year. Furthermore, Chancellor Rachel Reeves's autumn budget measures—including energy bill and rail fare relief—are expected to cut headline inflation by around 0.5 percentage points from Q2 2025, potentially bringing it close to the 2% target a year earlier than forecast.
Yet, significant risks remain. The MPC is concerned that wage growth remains stubbornly high. The Bank's agents estimate pay settlements next year will be around 3.5%, a level inconsistent with sustainably low inflation. Additionally, while the budget may suppress inflation in 2026, the Bank warns it could add 0.1 to 0.2 percentage points to price growth in 2027-28, as businesses pass on higher employment costs.
What This Means for Borrowers and Policy
For now, the rate cut provides immediate relief for mortgage holders and businesses. Most economists still anticipate at least one further reduction next year, contingent on weaker growth and cooling underlying inflation. However, the MPC's internal rift signals that the window for significant further cuts is narrowing rapidly.
The political narrative for Chancellor Reeves is also nuanced. While successive rate cuts offer short-term defensive ammunition, the Bank's analysis suggests her own policies have both dampened inflation in the near term and risk complicating the path for future monetary easing, creating a delicate balancing act for Downing Street.
