NEWS: BOE CUTS RATE TO 3.75%
- Dec 19, 2025
- 4 min read
BENCHMARK 4% REDUCED 0.25% TO 3.7% TO NEAR 3-YEAR LOW. BUT OUTLOOK FAR FROM DOVISH.
On 17/12/2025 the BOE Monetary Policy Committee (MCP) voted by a majority of 5–4 to reduce BOE Base Rate by 0.25 percentage points to 3.75%. Four members voted to maintain Bank Rate at 4%.
MARKET REACTION:
GBP/USD: Sterling traded slightly stronger against the dollar at around $1.3392.
10-year Gilts: Yields erased an earlier drop after the decision with
Traders trimmed bets of a future rate cut by 37 basis points.
Next Rate Decision is 05/02/2026.
The BOE Monetary Policy Committee (MCP) for the 6th consecutive time voted to reduce the Bank of England benchmark interest rate by 0.25% The Benchmark has now been reduced to 3.75% from the previous 4%. That vote in line with market predictions was however, far from Dovish finely balanced 5 - 4 Votes with the Governor Andrew Bailey voting to cut rather than hold.
BoE Governor Andrew Bailey warned of limited room in 2026 when the Monetary Policy Committee will face a “closer call” on its decisions, after it voted 5-4 on Thursday to reduce rates to a near three-year low of 3.75%.
Using as a comparator the years 2001 - 2006, the UK economy is roughly where it should be. Price Inflation (White Line) is below both the BoE Rate (Blue Line) and Wage Inflation (Purple line).
In a brief statement, the BoE explained its reasoning as follows:
Twelve-Month Consumer Price Index (CPI): CPI inflation has fallen since the previous meeting, to 3.2%. Although above the 2% target, it is now expected to fall back towards target more quickly in the near term.
CPI inflation was now expected to ease further in 2026 Q1, to around 3%. Before that, CPI inflation was expected to rise temporarily in December 2025, owing to an increase in tobacco duty and a pickup in airfares price inflation.
Some measures announced in the Budget, in particular one-off reductions to regulatory costs levied on households’ energy bills, and changes to fuel duty, were likely to lower CPI inflation in April by around ½ percentage point. This Budget news, in combination with other news in recent CPI data and with some downward moves in sterling oil and gas futures curves since November, had led Bank staff to lower their expectation for CPI inflation to closer to 2% in 2026 Q2.
The labour market had loosened further. The LFS unemployment rate had risen to 5.1% in the three months to October, 0.2 percentage points above the expectation in the November Report. The LFS redundancy rate had risen to 5.3 per 1,000 employees, its highest level since 2013, outside of the Covid pandemic period. But this series was prone to volatility, and the latest increase had not been mirrored in HR1 redundancy notifications.
In contrast, the level of vacancies had been broadly stable since the summer. Employment growth had remained subdued. An HMRC payrolls estimate of private sector employees had fallen even further than the headline HMRC estimate in the three months to November, extending a recent pattern of weakness. Public sector employment had been stronger.
Borrowing Costs were expected to come down next year, as the threat from inflation recedes. However, it cautioned in new language that decisions on future cuts will be finely balanced as the central bank edges toward the neutral interest rate — the level which neither pushes up inflation nor drags it down.
COMMENT
Personally, we are not impressed.
Bloomberg news which we use as the primary source for any financial/legal cross-over news, reports that Mr Bailey switched sides at the 11th hour on Thursday after a raft of data in recent days showed economic growth, the jobs market and price pressures all on a downward trajectory. An 11th hour turnabout from the Governor of the BoE does not inspire confidence in Mr Bailey's opinions as to the future projection of the UK economy. To compare, changing your plea on the first day of trial after maintaining the opposite stance in the lead up, will always look foolish even if it does for the right reasons.
Turning to comparators and market reactions, investors have increased bets that other major central banks are all but done with loosening policy. Later on Thursday the European Central Bank left its benchmark rate unchanged at 2% after some officials recently said the next move will be a hike. The Federal Reserve projected just one cut next year at their meeting earlier this month, while speculation over rate rises is mounting in Australia and Canada.
Ultimately, the suggestion that you can turn a stagnant highly indebted island economy with ever increasing social tax burdens, NIC and 'Workers Rights Bills' into a competitive 'growth economy' by altering the BoE base rate is like pointing a stick at the sun and commanding it turn indigo.
P.S. You should NEVER look directly at the sun with a magic wand or otherwise.
