LONDON, Dec 18 (Reuters) – The Bank of England cut interest rates on Thursday after a narrow vote by policymakers but it signalled that the already gradual pace of lowering borrowing costs might slow further.
After a sharp drop in inflation in data this week and a new forecast from BoE staff that growth will stagnate in late 2025, five Monetary Policy Committee members voted to lower the BoE’s benchmark rate for the fourth time in 2025 to 3.75% from 4.0%.
The four other members supported no change as they worried about the potential for Britain inflation’s rate – still the highest among the Group of Seven economies – to remain too high.
Governor Andrew Bailey changed his view and voted for a cut, tipping the balance on the committee.
“We still think rates are on a gradual path downward,” Bailey said in a statement. “But with every cut we make, how much further we go becomes a closer call.”
He said he did not yet see proof of a sharper downturn in the jobs market but he also noted inflation expectations had not dropped significantly so far.
Analysts polled by Reuters last week had mostly expected a 5-4 vote for a rate reduction.
The MPC echoed Bailey’s words in its end-of-meeting statement. But some senior policymakers who voted against the rate cut made clear their worries.
Deputy Governor Clare Lombardelli said she remained more concerned about the risk of inflation proving stronger than expected and the recent data had only softened “at the margin.”
Chief Economist Huw Pill said he saw a bigger risk of inflation getting stuck too high than too low.
The quarter-point cut took Bank Rate to its lowest level in nearly three years, although it is still almost double the equivalent rate of the European Central Bank.
British inflation remains higher than among peer economies – in part because of finance minister Rachel Reeves’ decision last year to raise taxes on employers – even after it fell unexpectedly sharply to 3.2% in data released on Wednesday.
The BoE said inflation was “now expected to fall back towards target more quickly in the near term” and the risk that it would persist at high levels had “become somewhat less pronounced.” The possibility of weaker demand pushing it too low remained, the post-meeting statement said.
Data on Tuesday showed a weakening jobs market including the highest unemployment rate since 2021 and a slowdown in private sector pay growth.
The BoE said it now expected zero economic growth in the last three months of 2025, down from a forecast of 0.3% growth made as recently as last month, although it thought underlying growth was stronger at about 0.2% a quarter.
Britain’s economy shrank by 0.1% in the three months to October amid reports that businesses put investment projects on ice in the run-up to Reeves’ budget on November 26.
The BoE said it expected the budget would bring down inflation in 2026 by about half a percentage point due to one-off measures which would then push it up a bit in the following two years.
The budget measures would add at most 0.2 percentage points to the size of the economy in 2026 and 2027.
Other major central banks are believed to be close to halting their rate cuts – the U.S. Federal Reserve last week signalled one more in 2026 while the ECB has probably already come to the end of its monetary loosening cycle.
The ECB was expected to keep rates on hold later on Thursday.
(Reporting by William Schomberg, Andy Bruce and Suban Abdulla)
((william.schomberg@thomsonreuters.com))
Keywords: BRITAIN BOE/
