The move was widely expected after data earlier this week showed that unemployment had risen to its highest in over four years in October, while inflation slowed more sharply than forecast in November as supermarkets and other retailers found it harder to pass on price increases.
The cut was the fourth this year and the sixth since the Bank started cutting rates in 2024, as the post-pandemic wave of inflation began to ebb. It brings the U.K.’s key rate down to its lowest level in nearly three years and will immediately benefit businesses whose borrowing costs are largely floating. It’s also likely to bring down the key two-year government bond yield, to which most new mortgages in the country are closely linked. That rate has already fallen some 0.15 percentage points in the last week in anticipation of today’s move.
As has been the case for most of the year, the MPC was deeply divided on how to balance the risks of a slowing economy with stubborn inflation, with Bailey once again casting the decisive fifth vote.
The MPC voted 5-4 in favor of the move, with both Chief Economist Huw Pill and Deputy Governor for Monetary Policy Clare Lombardelli voting against a cut.
The split was a little more ‘hawkish’ than many in financial markets had expected. Notably, neither of the MPC’s two most ‘dovish’ members proposed a bigger half-point cut. Accordingly, the pound rose against the dollar and the euro as participants trimmed expectations for further easing next year.
Most members of the MPC acknowledged that Chancellor Rachel Reeves’ budget, unveiled last month, will have the opposite effect from her previous one. The MPC judged that, by removing various charges from customers’ energy bills and imposing freezes on a number of government-administered prices, the budget will cut headline inflation by as much as half a percentage point by the middle of next year.