Bank of England Cuts Interest Rate to 3.75%, Offering Relief Amid Economic Uncertainties
On 18 December 2025, the Bank of England (BoE) reduced the Bank Rate by 0.25 percentage points to 3.75%, providing relief for mortgage payers. This cut was broadly anticipated by the markets, which have also priced in one to two further rate reductions in the coming year.
The BoE highlighted that Chancellor Rachel Reeves' budget measures, aimed at cutting inflation by about 0.5 percentage points next year through energy-bill relief and a freeze on fuel duty, could help the UK reach its 2% inflation target sooner than expected.
However, economic growth is expected to slow to zero in the fourth quarter, with a potential rise in unemployment and inflation remaining above target in the near term. Internal discussions at the BoE consider whether the current low inflation is a sign of successful policy or a reflection of an underlying demand slowdown. There are risks of wage-price pressures if households begin to adjust their inflation expectations.
Trade tensions, particularly between the US and China, could result in cheap imports being diverted to Europe, potentially lowering consumer prices. Yet, such shifts may harm European manufacturers and alter inflation dynamics. Additionally, longer-term concerns include the possibility that a less globalised world could increase transport costs and push prices higher over time.
