This reduction, which brings rates to their lowest level in nearly three years, was driven by a deteriorating labour market and signs that price rises will continue to slow into the new year.

The decision was reached through a contentious 5–4 vote within the Monetary Policy Committee (MPC), with Governor Andrew Bailey casting the deciding vote. Bailey argued that climbing unemployment, which jumped above 5% between October and November, combined with softer-than-expected growth, indicated an accumulation of slack in the economy. He suggested these factors now outweigh persistent but reducing inflationary pressures. Conversely, the dissenting hawks, including Deputy Governor Clare Lombardelli and Chief Economist Huw Pill, voted to hold rates at 4%, fearing that wage growth and services inflation remain too sticky to warrant further easing just yet.

This move marks the sixth cut in the current cycle and comes as the economy undershoots expectations. Recent figures showed a 0.1% fall in GDP for October, while redundancies have reached their highest level since February. However, the outlook for inflation has improved due to falling global energy prices and measures announced in the Chancellor’s Autumn Budget. Bank staff now predict inflation will return to the 2% target by the second quarter of next year, aided by demand-dampening taxes and regulatory changes to energy bills.

Economists have broadly welcomed the decision as a necessary shift in focus. Professor Joe Nellis of MHA notes that the priority is no longer solely about cooling prices but supporting an economy that has absorbed high interest rates for too long. He anticipates the cut will offer relief to the government and households while weakening sterling, which could make UK exports more competitive. Luke Bartholomew of Aberdeen Investments adds that while the closeness of the vote suggests lingering caution, the trajectory is clear, predicting the bank rate could head towards 3% late next year.

While the news is positive for borrowers, Kevin Brown of Scottish Friendly warns that savers should be on “red alert”. He advises that banks will likely reduce their best savings deals imminent, urging those holding cash to act quickly to secure competitive rates or consider investing to outpace inflation.

Governor Bailey said that while rates are on a gradual downward path, deciding how much further to go will become a “closer call” with every subsequent cut.