The Bank of England’s Monetary Policy Committee (MPC) voted today to cut its base rate from 4% to 3.75% in a widely expected move.

The reduction to the lowest level since 2023 comes after better news on inflation this week CPI falling to 3.2% in the 12 months to November, down from 3.6% in October.

At its meeting this week the Monetary Policy Committee voted by a majority of 5–4 to reduce Bank Rate by 0.25 percentage points, to 3.75%.

Four members voted to maintain Bank Rate at 4%.

The Bank's MPC expects a downward path to the base rate in 2026 but with GDP flat and unemployment beginning to rise, the Bank of England may see today's rate cut as a potential way to revive a moribund economy with cheaper borrowing.

The MPC statement today said: "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. Reflecting restrictive monetary policy, and consistent with evidence of subdued economic growth and building slack in the labour market, pay growth and services price inflation have continued to ease.

"Monetary policy is being set to ensure CPI inflation settles sustainably at 2% in the medium term, which involves balancing the risks around achieving this. The risk from greater inflation persistence has become somewhat less pronounced since the previous meeting, while the risk to medium-term inflation from weaker demand remains.

"The extent of further easing in monetary policy will depend on the evolution of the outlook for inflation. The restrictiveness of policy has fallen as Bank Rate has been reduced by 150 basis points since August 2024. On the basis of the current evidence, Bank Rate is likely to continue on a gradual downward path. But judgements around further policy easing will become a closer call." 

The decision is likely to lead to a fall in borrowing rates and savings rates. The MPC expects CPI inflation to ease further in 2026 Q1, to around 3%.

At the last Bank of England decision in November the MPC voted narrowly by 5-4 to keep the rate on hold as inflation remained stuck at 3.8%, well above the bank's 2% target. The bank reiterated today that its long term inflation target remains capped at 2%.

At its November meeting the Monetary Policy Committee judged that CPI inflation had "peaked."

This year the BoE has cut the base rate four times.

Reaction to the cut has mainly been positive.

Lindsay James, investment strategist at platform and wealth manager Quilter, said: “It should come as no surprise that the Bank of England has cut interest rates today, by a margin of five in favour to four against. Growth is weak, unemployment is rising and, crucially, inflation is falling. This trifecta gives you the ingredients required for an interest rate cut and the Monetary Policy Committee has delivered.

"While this brings interest rates below 4% once again, the big question going into next year is how much lower can they go? Today’s statement says that ‘judgements around further policy easing will become a closer call’, suggesting that rates may not go down as fast as some may like.

“Inflation is coming down and looks to be supportive to future rate cuts. Measures in the Budget and a slowing labour market would indicate that a lid will be kept on inflation next year. With economic growth also in the doldrums, and showing no sign of improvement in 2026, there will be a huge amount of pressure on the Bank of England to help stimulate some sort of economic activity, even if the fiscal picture looks anaemic."

Neil Wilson, Saxo UK Investor Strategist, said: "The Bank of England cut rates but it remains divided. We knew from the November meeting that Governor Andrew Bailey was leaning towards a cut this month, but it's finely balanced still.

"The slight undershoot in inflation and the dampening labour market probably swung things enough for the doves. But inflation remains too high and if anything, despite the tax hikes in the Budget, there is a fiscal stimulus (albeit modest) next year. This makes the outlook for future cuts a little cloudy, and we know that the MPC has basically cleaved down the middle into two camps of hawks and doves, with Bailey sitting in the middle.

"That means it only requires one or two members to shift their view to radically alter the pace and extent of rate cuts next year. But inflation is coming down just as the economy is on life-support, so further cuts in Feb and Apr should be expected, with ultimately a 3% Bank Rate at the end of this easing cycle."

Ed Monk, pensions and investment specialist at Fidelity, said: “Markets are pricing in one further quarter-point cut in the first half of 2026 but the picture beyond that is less certain. However, the chances of a second cut next year are increasing.

“For investors, lower rates reduce the attraction of cash savings. Returns from savings accounts and cash funds remain ahead of inflation but we are clearly returning to a world of lower cash returns. Cash and money market funds accounted for four of the top ten best-selling funds for Fidelity Personal Investing clients in November, indicating that many are happy to sit on the sidelines and milk risk-free returns from now.”

Adam Gillespie, partner at pensions firm XPS Group, said: "Whilst mortgage holders will welcome the relief, the impact on defined benefit schemes is more nuanced than headlines suggest, as funding is driven by long-term government bond yields rather than short-term rates. The level of rates is important for DB schemes, but with most now close to maximum hedging levels, the performance of interest rate hedges and the behaviour of the gilt curve matters just as much."