First interest rate reduction since summer brings borrowing costs to near three-year low
The Bank of England has reduced the base interest rate by 0.25 percentage points to 3.75%, taking it to its lowest level in almost three years and easing pressure on many mortgage borrowers.
Voting 5–4, the Monetary Policy Committee (MPC) decided to cut the Bank Rate from 4%, following a sharper-than-expected drop in inflation and signs of weaker economic growth. Consumer Prices Index (CPI) inflation fell to 3.2% in November, down from 3.6% in October, as lower food, drink, alcohol and tobacco inflation fed through into the headline rate.
The Monetary Policy Committee voted by a majority of 5-4 to cut interest rates to 3.75%.
— Bank of England (@bankofengland) December 18, 2025
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The decision marks a shift from November, when the MPC voted 5–4 to keep rates on hold and governor Andrew Bailey cast the deciding vote against a cut. Economists had widely predicted that Bailey would change sides at this meeting, giving a narrow majority in favour of easing policy.
Market pricing and surveys of forecasters had strongly pointed to a 0.25 percentage point move, with only a minority viewing a larger cut as possible. The new 3.75% level remains well above the Bank’s 2% inflation target, but policymakers appear more confident that price pressures are on a “gradual downward path” as the labour market cools and growth remains subdued.
“Today’s decision by the MPC to cut rates will be welcomed by borrowers,” said Marylen Edwards, director of mortgages at specialist lender MT Finance. “After interest rates were cut by the US Federal Reserve last week, it seemed inevitable that the Bank of England would follow suit, particularly after inflation fell in November.”
“This is what so many were hoping for – the Bank of England has sent a clear signal that it wants to reduce the cost of borrowing, and we expect the property market to respond quickly, added Paresh Raja, chief executive of Market Financial Solutions.
“Much of October and November’s stalled activity ahead of the Autumn Budget is already now flowing through, and today’s cut will undoubtedly add further momentum. Yes, the market will slow over the festive period, but once we're into the new year, we should expect to see greater confidence and demand among property investors and homebuyers.
“Lenders must be ready to support brokers and borrowers as activity accelerates. In doing so, we can lay the foundations for a robust and growing property market in 2026.”
The latest base rate cut is likely to reinforce recent moves in swap rates and wholesale funding costs, supporting further rate adjustments across fixed products in the coming weeks, though lenders are expected to move cautiously while they assess the Bank’s guidance on the pace of any future reductions.
Forward markets had already been signalling the possibility of additional cuts at early 2026 meetings, but expectations remain limited given that UK inflation is still higher than in other major advanced economies and services inflation has eased only slowly. The central bank is expected to stress that policy will stay restrictive until it is more confident that underlying price pressures have normalised.
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