Bank of England Slashes Interest Rate to 3.75% Amid Weakening UK Economy
Inflation falls, growth slows, and a divided MPC paves the way for lower rates into 2026
Bank of England Cuts Base Rate Again
The Bank of England has lowered the base interest rate by 25 basis points to 3.75%, its lowest level since early 2023. The decision reflects mounting concerns about slowing inflation and an economy on the brink of stagnation.
This marks the fourth rate cut in 2025, following the last adjustment in August. The move was expected by analysts, but investor sentiment remains cautious, particularly with inflation still above the Bank's 2% target
What Prompted the Rate Cut?
The central bank’s Monetary Policy Committee (MPC) voted 5-4 in favour of the cut. This marks a shift from the previous meeting, where the vote leaned towards holding rates. The latest vote suggests an increasing willingness among policymakers to support the UK economy amid signs of slowdown
Key reasons behind the cut include:
- Falling inflation: The Consumer Price Index (CPI) dropped to 3.2% in November, down from 3.6% in October – the lowest level since March.
- Rising unemployment: The job market is cooling, with the highest unemployment rate since 2021.
- Contraction in GDP: The UK economy shrank by 0.1% in the three months to October, signalling potential recession risks.
Despite this rate reduction, UK inflation remains the highest among G7 countries, keeping pressure on the Bank of England’s long-term goals
What This Means for Borrowers and Investors
A lower base rate typically makes borrowing cheaper for consumers and businesses, which could stimulate spending and investment. However, savers may see reduced returns on deposits.
For investors:
- Equities: Lower rates tend to benefit stocks, particularly in sectors like real estate, consumer discretionary, and technology.
- Bonds: Falling interest rates support bond prices, especially longer-duration government and corporate bonds.
- Sterling: The pound has eased slightly, reflecting concerns about the UK’s economic outlook and growing divergence between UK and US central bank policies.
Market Expectations Going Forward
Markets are currently pricing in just one more rate cut in 2026, likely by April. However, analysts at ING suggest that further cuts may come earlier than expected, particularly if inflation continues to trend downwards
Key points to watch:
- February and April 2026 rate decisions could bring additional cuts.
- Market volatility may increase if inflation surprises to the upside or downside.
- Fiscal policy from the Spring Budget could influence the Bank’s path.
Wider Economic Impact
The latest cut reflects not just falling prices, but broader weakness in the economy. Business investment is reportedly stalling, with firms delaying decisions in anticipation of the Spring Budget.
If the trend continues:
- Mortgage rates may continue to fall, potentially reigniting the housing market.
- Retail spending could stabilise as consumer confidence recovers.
- Growth prospects for 2026 may improve, especially if supported by lower inflation.
Conclusion
The Bank of England’s move to cut the base rate to 3.75% signals a shift toward a more accommodative monetary policy amid economic fragility. While the cut offers relief for borrowers and may support markets, it also highlights the UK’s ongoing challenges with inflation and growth.
Investors should closely monitor upcoming economic data, particularly on wages, employment, and inflation, as they will shape future interest rate decisions and broader market sentiment.
Sources: (BBC.co.uk, Investing.com)
