The Bank of England voted 5-4 on Thursday to cut its benchmark interest rate by 25 basis points to 3.75%, marking its fourth reduction of 2025. The closely split decision reflects ongoing divisions within the Monetary Policy Committee between those prioritizing slowing inflation—still at 3.2% in November—and those focused on supporting a stagnant economy.

In its statement, the MPC noted inflation is “now expected to fall back towards target more quickly in the near term” but emphasized that further easing “will depend on the evolution of the outlook for inflation.” The committee indicated the Bank Rate is “likely to continue on a gradual downward path,” though future decisions will become “a closer call.”

Economic Context and Market Reaction

The cut arrives amid weak growth—the BOE expects zero expansion in the fourth quarter—and a softening labor market. Chancellor Rachel Reeves welcomed the move, calling it “good news for families with mortgages and businesses with loans.” Markets responded calmly: sterling held steady against the dollar, the FTSE 100 was flat, and 10-year gilt yields edged up slightly to 4.510%.

Outlook for 2026: Cautious and Data-Dependent

Economists anticipate additional cuts in early 2026, but the pace remains uncertain. JPMorgan forecasts trims in March and June, bringing the rate to 3.25%, while Morgan Stanley expects another cut in February followed by two more in the first half of the year. However, persistently high wage growth could slow the easing cycle.

“We will see cuts but perhaps not many more from here,” Barclays’ Jack Meaning told CNBC, noting the BOE is keeping its options open amid downgraded growth and inflation projections. The central bank’s cautious stance suggests it will prioritize data over pre-set timelines, particularly regarding labor market dynamics and inflationary trends.

For now, the cut offers modest relief to borrowers but signals that the BOE’s path forward will be measured and contingent on economic indicators—a balancing act between fostering growth and ensuring inflation returns sustainably to its 2% target.