Yesterday, the Bank of England announced that it has cut the UK base interest rate from 4% to 3.75%, the lowest level since February 2023.
The decision, which has been announced just ahead of Christmas, is likely a reaction to the country’s slowing economy and the rise in unemployment.
The Monetary Policy Committee (MPC) voted 5-4 in favour of the rate cut, showing that even this decision wasn’t unanimous. 4 members voted to hold rates, worrying that inflation and wage growth were still not at the level they needed it to be.
Why Cut Rates Now?
Rate cuts are designed to stimulate economic activity, but only if inflation is under control. If rates are too low and spending is too high, inflation can grow too quickly, making it difficult to bring down.
At present the Bank of England has a 2% inflation target, however, consumer price inflation stood at 3.2% in November, down from the previous month, but still above their target.
So why cut rates now? Well, economic activity is down, and if rates stay high for too long, this can cause a recession. The bank is likely making a bet that the risk of the economy dropping is now higher than inflation staying high for too long. Combine this with higher unemployment and reduced spending and you can see why we have a problem.
According to the BBC, the Bank of England does still think the 2% target will be hit next year, which is probably why they felt confident cutting the rate.
What The Rate Cut Means For Businesses
The rate cut will come as a welcome relief for businesses, many of whom have taken out loans, are renting out office spaces and pay staff.
With the cost of borrowing down, some businesses may even have extra cash to invest in staff and their own operations. However, the bank have warned that further cuts are not guaranteed, which could be a sign for companies to stay cautious as inflation continues to fall.
To find out how businesses responded to the news, we asked the experts, here’s what they had to say:
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Isaac Stell, Investment Manager at Wealth Club
“In the face of an economically bleak mid-winter, the Bank of England has cut interest rates by 0.25% today, delivering its fourth and final interest rate cut of 2025.
Yesterday’s better than expected inflation numbers gave the BoE sufficient cover to cut interest rates today, with the headline rate now sitting at 3.75%. However, the MPC was once again split, with four members voting against cutting rates despite a clearly declining labour market and weakening economy. For those voting against the cut, inflationary concerns continue to trump everything else.
With inflation having declined so steeply in November, traders have ramped up bets for additional rate cuts in 2026, the effect of which helped push the FTSE 100 closer to the elusive 10,000 mark, a poignant reminder that the stock market is not the economy.
Further rate cuts in 2026 should provide consumers with the confidence to splurge rather than save, which will help boost economic growth. The treasury and the government will certainly be looking on in hope of an economic Christmas miracle.”
John Fraser-Tucker, Head of Mortgages at Mojo Mortgages
“Lenders are essentially ‘pricing in’ this anticipated drop. For those looking at remortgaging in early 2026, the market is beginning to show more appetite, but it’s a delicate balance. Even a small base rate reduction acts as a vital catalyst for affordability, potentially releasing a wave of pent-up demand from buyers who have been sitting on the fence while rates hovered at 4%.”
Victor Trokoudes, Founder and CEO at Plum
“The Bank of England’s decision to cut the base rate by 0.25 percentage points to 3.75% was expected, given the economic downturn and rising unemployment. UK GDP contracted by 0.1% in October, consumer spending has slowed and unemployment has risen to 5.1%, pointing to a looser labour market. Although inflation remains above target at 3.2%, it has fallen to an eight-month low, easing pressure on policymakers. The cut signals the Bank is prioritising financial stability and growth over strict inflation control, following the Federal Reserve’s example. The key question now is how quickly further cuts can follow while inflation remains elevated.”
Julian Jessop, Economics Fellow at the Institute of Economic Affairs
