In a significant pre-Christmas decision, the Bank of England has moved to cut interest rates, bringing borrowing costs down to their lowest point in nearly three years. The central bank's Monetary Policy Committee (MPC) voted to reduce the base rate from 4% to 3.75% at its final meeting of 2025.
A Close Vote Signals Shifting Economic Winds
The decision, taken on Thursday 18 December 2025, was not unanimous. The nine-member committee saw a five-to-four split in favour of the cut, with Governor Andrew Bailey himself siding with the majority who advocated for lower rates. This narrow vote underscores the delicate balancing act the Bank faces in steering the UK economy.
Governor Bailey pointed to encouraging data as the rationale for the move, stating the UK has definitively "passed the recent peak in inflation and it has continued to fall." This marks the fourth time the MPC has reduced borrowing costs this year, signalling a sustained shift in monetary policy away from the high-rate environment used to combat soaring prices.
Inflation Fall and Budget Measures Accelerate Timeline
The rate cut follows the release of official figures showing a sharp decline in the Consumer Prices Index (CPI). Inflation dropped to 3.2% in November, down from 3.6% in October. While this remains above the Bank's 2% target, the MPC's minutes revealed an expectation that inflation will fall back more rapidly.
The minutes cited recent Budget announcements on administered prices and indirect taxes as key factors, predicting headline inflation will now drop to closer to 2% by April next year. This is a dramatically accelerated timeline compared to the Bank's previous forecast in November, which had suggested the target might not be met until early 2027.
Implications for Borrowers and the Economic Outlook
By lowering the base rate to its lowest level since early 2023, the Bank of England is aiming to provide relief to households and businesses with variable-rate mortgages and loans. The move is designed to stimulate economic activity by making credit cheaper, supporting growth as inflation recedes.
This pivotal decision reflects the Bank's increasing confidence that the inflationary crisis is being brought under control, allowing it to focus more on supporting the wider economy. The close nature of the vote, however, suggests future decisions will remain highly data-dependent as the MPC navigates the path towards stable prices and sustainable growth.
