Bank of England cuts rate to 3.75% after 5-4 vote

Interest rates are now 3.75%, the lowest for almost three years, after a knife-edge 5-4 vote by the Bank of England’s Monetary Policy Committee. We’ll keep this simple: the Bank still expects a gradual downward path from here, but says each future cut will be a closer call.

Why the move now? Bank Rate fell from 4% because unemployment has been edging up and growth looks weak. The Bank says inflation is easing faster than it expected a few months ago, so policy can loosen a touch without losing grip on prices.

Inflation ran at 3.2% in November, and the Bank now thinks it will be closer to the 2% target by spring or summer 2026. That is earlier than previous guidance that pointed to 2027. The trade-off is a flat end to the year: the Bank is pencilling in zero growth for the final quarter of 2025.

Let’s make this practical for mortgages. About 500,000 households on tracker deals, which move in line with Bank Rate, should see a typical fall of around £29 a month. If you’re on a standard variable rate, your lender chooses whether and when to pass the cut on. Most borrowers are on fixed rates, so nothing changes until your deal ends.

Kayleigh Taylor told the BBC her repayments jumped by about £1,000 a month when she last remortgaged after a one-year fix. Her family in Billericay, Essex, are due to remortgage in 2026 and are weighing whether to stay put or move if rates keep falling. That uncertainty will feel familiar if you locked in during the peak and are now watching for relief.

Savers need to watch the small print. Lower Bank Rate often nudges easy-access returns down. If you rely on interest income, check notice periods, introductory bonuses and withdrawal rules on your account, and compare fixed terms before providers update pricing. A small percentage-point shift can add or remove meaningful cash over a year.

Policy choices also matter for prices. After November’s Budget, ministers set out a £150 cut to household energy bills and freezes on fuel duty, medical prescriptions and rail fares. Combined with lower oil and gas prices, the Bank says these measures help push inflation towards 2% by spring or summer 2026 rather than 2027.

What are firms and shoppers saying? The Bank’s agents report a lacklustre picture, with businesses cautious before the Budget and households focused on value. Food shops are smaller than usual, discounters say early seasonal sales are solid, and hospitality is trying to hold the line on prices given fragile demand and affordability worries.

Food prices have done the heavy lifting in the latest fall in inflation. Governor Andrew Bailey called that good news and said price rises are easing a bit faster than expected after this year’s hump. He would not commit to dates for more cuts, stressing that every step from here will be debated.

Forecasters are already testing the path. Ruth Gregory at Capital Economics says a further move as soon as February is possible, and that Bank Rate could reach about 3% in 2026 rather than the 3.5% that markets had pencilled in. Treat that as an informed scenario, not a certainty - incoming data will decide.

Politics will stay noisy, but the Bank acts independently. Chancellor Rachel Reeves welcomed the decision, noting it is the sixth cut since the election and, she says, the fastest pace in 17 years. The shadow chancellor, Mel Stride, argues it reflects economic weakness. Remember the lesson here: higher rates cool demand and help bring prices back to target, but keeping them high for too long can choke investment and jobs. For your own finances, note your deal end date, test your budget at slightly higher and slightly lower rates, and ask your lender what today’s decision changes for you.