Bank of England cuts interest rates to lowest level since February 2023
The Bank of England has cut interest rates from 4% to 3.75% – the lowest level since February 2023.
At its meeting ending on Wednesday (17 December), 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 the Bank Rate at 4%.
In an accompanying note, the central bank noted that CPI inflation has fallen since the previous meeting, to 3.2%. Although above the 2% target, it is now expected to fall back towards the 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 service 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,” it said.
The extent of further easing in monetary policy will depend on the evolution of the outlook for inflation, the bank said.
“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, the Bank Rate is likely to continue on a gradual downward path. But judgments around further policy easing will become a closer call.”
Remaining vigilant
Andrew Bailey, the Governor of the Bank of England, was one of the members who voted to cut rates.
“Data news since our latest meeting suggests that disinflation is now more established. CPI inflation has fallen from its recent peak and upside risks have eased. Measures in the Budget should reduce inflation further in the near term. The key question for me now is the extent to which inflation settles at the 2% target in an enduring way,” he said.
“Slack has continued to accumulate in the economy. Unemployment, underemployment and flows from employment to unemployment have all risen. While I do not yet see conclusive evidence of a sharper downturn in the labour market, we should be vigilant.
“On the other hand, inflation expectations have not yet shifted downward sufficiently following the past few years of persistent above-target inflation. And the strength in forward-looking wage growth indicators is hard to reconcile with the downward momentum in current indicators of inflation and pay, as well as rising unemployment.
“I will continue to assess these risks as the evidence accumulates. While I see scope for some additional policy easing, the path for Bank Rate cannot be pre-judged with precision, recognising in part the more limited space as Bank Rate approaches a neutral level,” he said.
