A closely split decision at the Bank of England has sharpened expectations that the UK’s interest rate-cutting cycle may be approaching its conclusion. While borrowers received welcome relief from the latest reduction, policymakers signaled that future cuts are becoming increasingly uncertain as inflation risks persist beneath the surface.
A Timely Boost for Borrowers and the Government
The rate cut comes as a political and economic boost for Chancellor Rachel Reeves, easing pressure on borrowers following last month’s autumn budget. Lower interest rates should help reduce mortgage costs and improve financial conditions for households facing high living expenses.
Financial markets had largely priced in the cut, with investors heavily betting on further easing as inflation cooled and growth momentum weakened. However, the tone of the Bank’s communication suggested the path ahead may be far more cautious.
“We still think rates are on a gradual downward path,” Bank of England Governor Andrew Bailey said. “But with every cut we make, how much further we go becomes a closer call.”
Deep Divisions Within the MPC
The narrow vote revealed growing disagreement inside the nine-member MPC. While five members, including Bailey, supported the pre-Christmas rate cut, four members dissented, signaling they believe the endpoint of the easing cycle may already have been reached.
These divisions reflect differing interpretations of the UK’s inflation outlook. Some policymakers see weakening economic conditions as justification for further easing, while others remain concerned about stubborn price pressures that could re-emerge.
The close split suggests future decisions will be finely balanced, increasing uncertainty for markets, borrowers, and businesses planning for 2025 and beyond.
Inflation Slows, but Risks Remain
The decision followed new data showing a marked slowdown in headline inflation, which fell to 3.2% in November. This eased concerns that price pressures were becoming entrenched and strengthened the case for a rate cut.
At the same time, the UK economy is struggling to regain momentum. Growth remains weak, unemployment is edging higher, and consumer confidence is fragile. The Bank now believes economic activity likely flatlined in the fourth quarter, underlining the fragile state of the recovery.
For some MPC members, these conditions argue for continued policy support through lower borrowing costs.
Budget Measures Could Help Hit Inflation Target Sooner
The Bank estimates that measures announced in Reeves’s autumn budget — including relief on energy bills, rail fares, and prescription charges — could reduce headline inflation by around 0.5 percentage points from the second quarter of next year.
This would bring inflation closer to the Bank’s 2% target earlier than previously expected. Some policymakers believe that anchoring inflation near target could help shape wage negotiations and pricing behavior, preventing a renewed surge in price growth.
If businesses and households become confident that inflation is under control, the risk of a wage-price spiral could diminish, strengthening the case for at least one more rate cut.
Wage Growth a Key Concern
Despite improving headline inflation, concerns remain over wage growth, which continues to run at levels considered inconsistent with the inflation target.
The Bank’s regional agents estimate that annual pay settlements next year could average around 3.5%. While lower than recent peaks, this remains elevated given weak economic conditions and rising unemployment.
For more hawkish MPC members, strong wage growth suggests underlying inflationary pressures may persist even as headline inflation falls, limiting how far rates can be reduced.
Medium-Term Inflation Pressures Loom
Looking further ahead, the MPC expects government policies to subtract from inflation in 2026 but potentially add to price growth in 2027 and 2028 by between 0.1 and 0.2 percentage points.
Business leaders have warned that higher employment costs — including increases to the living wage, expanded employment rights, and potential pension-related taxes — could force companies to raise prices.
These medium-term risks complicate the Bank’s task, reinforcing the argument for caution as rates approach a neutral level.
Political and Market Implications
For the Labour government, six consecutive rate cuts provide ammunition to defend its economic strategy in the short term. Lower borrowing costs support households and may help stabilize confidence during a period of weak growth.
However, economists caution that monetary policy alone cannot resolve structural challenges facing the UK economy, including low productivity and subdued investment.
Markets now expect at least one more rate cut next year, but expectations beyond that are increasingly uncertain.
The End of the Cycle in Sight
Most analysts agree that the Bank of England is nearing the end of its easing phase. While further cuts remain possible, the margin for action is narrowing as inflation risks, wage pressures, and fiscal dynamics intersect.
Weaker growth, rising unemployment, and additional evidence of slowing inflation could justify another move lower. But the era of steady, predictable rate cuts appears to be drawing to a close.
As Governor Bailey suggested, each decision from here will be more finely judged — and the endpoint of the cycle is coming into clearer focus.