The Bank of England has delivered a pre-Christmas boost to borrowers, cutting the UK's base interest rate after official data showed inflation fell to an eight-month low.
Rate Cut Confirmed as Inflation Cools
At its final meeting of 2025 on Thursday, 18 December, the Bank's Monetary Policy Committee (MPC) voted to reduce the base rate from 4% to 3.75%. This marks the fourth cut this year, following reductions in February, May, and August, bringing borrowing costs to their lowest level since the start of February 2023.
The decision was widely anticipated after the Office for National Statistics (ONS) revealed that the Consumer Prices Index (CPI) inflation rate dropped to 3.2% in November, down from 3.6% in October. This decrease was sharper than economists had forecast.
What Drove the Inflation Drop?
The fall in the headline inflation figure was largely driven by easing prices in key sectors. Food and drink inflation slowed significantly to 4.2% from 4.9% the previous month. Prices for alcohol and tobacco also showed a notable easing of upward pressure.
Despite the welcome decline, the Bank of England's Governor and the MPC have been cautious, as inflation remains stubbornly above the official 2% target. The recent glut of softer economic data, however, tipped the balance towards a cut.
Last week, the UK economy was confirmed to have contracted by 0.1% in October. This week also brought news of rising unemployment and slowing wage growth, painting a picture of a cooling economy that requires less restrictive monetary policy.
Analysts React and Look Ahead to 2026
Economists had seen the inflation data as the final signal needed for a December move. James Smith, developed market economist for ING, stated the sharp drop "green lights" a rate cut, adding that "Christmas has come early for the doves at the Bank of England."
He forecasts inflation to fall close to the 2% target by May 2026 and expects two further rate cuts in February and April next year.
However, uncertainty remains about the pace of future reductions. Danni Hewson, head of financial analysis at AJ Bell, noted: "There are still massive question marks about what 2026 will bring." Markets currently anticipate only one or two more cuts over the coming year, suggesting an era of ultra-low interest rates is not on the immediate horizon.
The FTSE 100 reacted positively to the prospect of lower rates ahead of the announcement, closing up 0.9% on Wednesday at 9,774.32.
This rate cut is notable as it brings the base rate to its lowest point in nearly three years. The last time the Bank implemented four or more cuts in a single year was during the 2008 financial crisis, though the economic circumstances today are vastly different.
