Bank of England Cuts Bank Rate to 3.75%
Amid Continued Disinflation and Building Labor Market Slack
London, 18 December 2025
The Bank of England’s Monetary Policy Committee (MPC) announced on December 18, 2025, a reduction in the official Bank Rate. Following its meeting that concluded on December 17, the MPC voted by a majority of 5–4 to reduce the rate by 0.25 percentage points, setting the new Bank Rate at 3.75%.
Four members of the Committee voted to maintain the Bank Rate at 4%. The MPC’s core objective remains ensuring that CPI inflation settles sustainably at the 2% target in the medium term.
Encouraging Inflation Outlook
The decision to reduce the rate reflects continued progress in the disinflation process. Twelve-month CPI inflation eased to 3.2% in November, down from 3.6% in October. This easing suggests that inflation is expected to return to the 2% target more quickly in the near term. Services consumer price inflation also continued to fall, registering 4.4% in November.
The outlook improved following the Autumn Budget announcements. Policy measures announced in the Budget, specifically one-off reductions to regulatory costs on energy bills and changes to fuel duty, are likely to lower CPI inflation in April by approximately ½ percentage point. This news, combined with other data, has led Bank staff to reduce the expectation for CPI inflation to closer to 2% in the second quarter of 2026 (Q2).
Subdued Growth and Loosening Labor Market
Monetary policy is being set to reflect restrictive conditions, which are consistent with evidence of subdued economic growth and building slack in the labor market.
Key economic facts supporting the cut include:
Economic Growth: GDP growth eased to 0.1% in Q3 2025. Bank staff now expect zero growth in headline GDP in Q4.
Wages and Pay: Pay growth has continued to ease. Annual growth in whole economy Average Weekly Earnings (AWE) declined to 4.7% in the three months to October, while private sector regular AWE pay growth fell to 3.9%.
Unemployment: The labor market has loosened further. The LFS unemployment rate rose to 5.1% in the three months to October. The redundancy rate increased to 5.3 per 1,000 employees, reaching its highest level since 2013, outside of the pandemic period.
Despite easing current indicators, forward-looking wage indicators remain elevated. Firms’ year-ahead own-price inflation expectations rose slightly to 3.7%. Agents’ contacts suggested pay settlements are expected to be around 3.5% in 2026.
Committee Split on Risks
The vote highlighted divergent views on the balance of risks to inflation.
Five members voted to reduce the rate (to 3.75%): This group judged that disinflation was on track and that upside risks had continued to recede. Some, like Swati Dhingra and Alan Taylor, attached greater weight to downside risks to activity and inflation, noting that subdued consumption and rising unemployment were sufficient to restrain inflation persistence. Alan Taylor estimated the neutral rate to be about 3% and believed the Bank should move towards it sooner rather than later, given the expected inflation path.
Four members voted to maintain the rate (at 4%): These members emphasized prolonged inflation persistence, partly due to structural factors. They argued that current and forward-looking evidence on services inflation, wage growth, and expectations remained above target-consistent levels. These members were not convinced the current policy stance was meaningfully restrictive, warranting a more prolonged period of restriction to mitigate upside risks. Huw Pill, for instance, judged the risk of inflation stabilizing above target due to structural changes as greater than the risk of undershooting the target due to weak demand.
The MPC anticipates that the restrictiveness of policy will continue to fall as Bank Rate is reduced, noting that judgments around further policy easing will become a closer call as the rate approaches a neutral level.
The Bank Rate has been reduced by 150 basis points since August 2024. The stock of UK government bonds held for monetary policy purposes on December 17 was £553 billion. The next MPC minutes are due to be published on February 5, 2026.