Bank of England Cuts Rates as Unemployment Hits Three-Year High

TLDR

• Bank of England cut its base rate by 25 basis points to 3.75% on Thursday, the fourth reduction this year
• The vote was split 5-4 among the nine-member Monetary Policy Committee, showing division on the decision
• UK inflation dropped to 3.2% in November from 3.6% the previous month, below the Bank’s 3.4% forecast
• Britain’s unemployment rate reached 5.1%, the highest level since January 2021, while the economy shrank 0.1% through October
• Investors expect only one more rate cut in 2026, likely by the end of April

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The Bank of England reduced its key interest rate to 3.75% on Thursday, marking the fourth rate cut of 2025. The quarter-point reduction brings the base rate to its lowest level since February 2023.

The decision followed a drop in UK consumer price inflation to 3.2% in November. This represented a decline from 3.6% the previous month and came in below the central bank’s forecast of 3.4%.

The nine-member Monetary Policy Committee voted 5-4 in favor of the rate cut. Four policymakers wanted to keep rates unchanged at 4%. This split represented a shift from the previous meeting when the committee voted 5-4 to hold rates steady.

The rate reduction was the first since August 2025. The Bank had paused cuts at its most recent meeting before resuming reductions at this week’s decision.

Economic Pressures Mount

Britain’s economy has shown signs of weakness in recent months. Data released this week showed the economy contracted 0.1% in the three months through October.

The labor market has also deteriorated. The unemployment rate rose to 5.1% in recent data, marking the highest level since January 2021. Job vacancies across the country have declined as employers pull back on hiring.

Reports suggest businesses postponed investment projects ahead of the Autumn budget released in late November. This pause in business activity contributed to the economic contraction seen in October.

Despite the recent decline, UK inflation remains above the Bank of England’s 2% target. The current 3.2% rate is the highest among G7 countries.

Britain’s inflation rate also exceeds levels seen in other major economies. The eurozone inflation rate held at 2.1% in November. The US reported 3.0% inflation in September in its most recent data.

Future Rate Path Uncertain

Market pricing suggests limited additional rate cuts in 2026. Investors are fully pricing in only one more quarter-point reduction, most likely by the end of April.

Some analysts predict more aggressive easing. ING economists forecast rate cuts in both February and April 2026, doubling the single cut priced into markets.

Bets on a second rate cut in early 2026 increased after the November inflation data was released. The lower-than-expected reading gave traders more confidence the Bank would continue reducing rates.

The split vote among committee members reflects ongoing uncertainty about the inflation outlook. The four members who voted against the cut remain focused on bringing inflation back to the 2% target.

Lower interest rates reduce borrowing costs for consumers and businesses. This can stimulate spending and investment but also carries the risk of pushing prices higher again.

The Bank of England cut its benchmark rate from 4% to 3.75% on Thursday, completing the fourth rate reduction of 2025.

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