Bank of England cuts rates to 3.75% – industry reaction

Bank of England has cut interest rates by a quarter point to 3.75% in response to a weakening labour market and slowing inflation. The Monetary Policy Committee (MPC) voted 5-4 in favour of the cut, marking the first reduction since August.

Paul Broadhead, Head of Mortgage and Housing Policy at the Building Societies Association, said “With more than half (54%) of would be first-time buyers saying mortgage affordability is a major barrier to homeownership, today’s decision to cut the Bank Rate will come as welcome news for many. Shaving 0.25% off the Bank Rate is not a silver bullet, but it is an encouraging sign that the pressures on first-time buyers are starting to ease.

“Lower rates, alongside recent regulatory changes, a review of the Lifetime Individual Savings Account (LISA) and continued product innovation from building societies, should collectively help rebuild confidence that homeownership can once again be a realistic goal.

”The picture for savers is different. Falling rates, combined with the pending changes to savings taxation, will be felt by those working hard to build financial resilience and save for their future, including those saving for a first-home deposit.”

John Phillips, CEO of Just Mortgages and Spicerhaart, said “The central bank has delivered a festive boost for borrowers, confirming a rate cut a week before Christmas. Given the timing, we may not see an instant reaction from potential buyers or movers, but combined with the positive news on inflation yesterday, it will certainly go a long way in boosting confidence and encouraging more clients to get their plans back on track. With Boxing Day always busy for property searches, we could certainly be in for a positive start to the new year.

“Now is absolutely the time for brokers to be communicating these positive headlines to borrowers and reminding potential buyers and movers of everything the mortgage market has to offer – particularly recent activity from lenders on rates and criteria. While the signs look promising, a new year bounce is far from a given. We have to play our part in achieving this by educating clients, nurturing confidence and facilitating transactions.”

Charles Resnick, Chief Finance Officer at Afin Bank, said “The Bank of England is walking a bit of a tightrope at the moment, balancing its aim of returning inflation sustainably to its 2% target, below the current rate of 3.6%, while being cautious not to ease policy too quickly while domestic cost pressures persist.

“Although today’s cut to the Base Rate was not a surprise, it could easily have gone the other way with interest rates left unchanged. You only have to look at the last MPC meeting in November, when the vote was 5-4 in favour of keeping the rate flat, to see there is a difference of opinion within the committee. The minutes from today’s meeting will be interesting. Mortgage lenders are expected to remain disciplined, reflecting ongoing uncertainty around the pace of further cuts given the MPC’s emphasis on a cautious, data-dependent easing cycle.”

Simon Webb, Managing Director of capital markets and finance at LiveMore said “Today’s base rate cut will provide welcome breathing space for many older borrowers, particularly those on variable rate or tracker products. The Autumn Budget announcement included a number of changes that will disproportionately affect many older homeowners, especially those who are asset-rich, but cash-poor. Falling interest rates as we head into 2026, will increase affordability for any older borrowers looking to remortgage, as part of the estimated 1.8 million mortgages due to mature next year.

“Affordability is a key concern at LiveMore, so we’ve designed our lending solutions to consider more than just traditional lending criteria. Via our Mortgage Matcher® we can also identify solutions from our wide range of products, whether that’s a RIO mortgage, interest-only product or lifetime mortgage, that may be appropriate for clients.”

Emma Wall, Chief Investment Strategist at Hargreaves Lansdown said “The Bank of England Monetary Policy Committee has cut interest rates to 3.75% from 4% in a move that surprised no one. The rate cut was all but nailed on yesterday thanks to inflation data which showed price growth slowed to 3.2% for November, down from 3.6% the previous month. Weak growth data last week that showed four months of GDP contraction to the end of October would have been another green light to the rate doves.

“What has surprised markets is how tight the vote was however, making the path from here far less certain. While inflation is falling, it is still far above the Bank target of 2%, and the MPC voting record revealed that four members favoured a hold today – likely because of these pricing concerns. Bank Governor Bailey has long drummed that decisions will be data led, and it is interesting to see this in action – jobs data is weaker, and economic growth is non-existent, which could have swayed more members to vote for the cut. But to misquote James Carville – ‘it is all about inflation, stupid’.  Bailey has commented in the press conference live now that jobs data is not yet conclusive. The inference being that inflation at 50% higher than target, is. The gilt market is largely unmoved, though we have seen some yields come down a little through the day – a sign that today’s action was already priced in.”

Anna Leach, Chief Economist at the Institute of Directors, said “The MPC voted as widely expected to reduce rates by 25 basis points to 3.75% – the lowest they’ve been since January 2023. The vote split was likewise as expected, with the Governor the swing voter, swayed by multiple data points – activity, unemployment, wages and inflation – all giving the all-clear for gently easing back on monetary constraints.

“Interestingly, the Bank of England judge that the Budget on balance added to overall inflationary pressures, with the short-term 0.5% point reduction in headline inflation in 2026 more than offset by fiscal loosening over the next couple of years, leading to inflation marginally higher in 2027 and 2028. But a weaker outlook for gas and fuel prices, along with some easing in inflation expectations, pay growth, the broader labour market, demand as a whole and inflation itself gave enough members of the MPC comfort to lower rates. There’s still residual concern that wage growth and services both remain elevated, but counterbalanced by the reality that business and consumer confidence remains depressed, injecting caution into spending and therefore demand.

“Looking into next year, inflation should keep tracking down. Overall risks to the inflationary outlook remain balanced, suggesting the MPC will continue to be cautious in lowering rates further – particularly when inflation has only been in the target range for 24% of the past four years. But it’s notable that the Bank has revised their Q4 GDP expectation to zero, quite a change from the 0.3% growth they expected only 6 weeks ago, and a weak springboard for 2026. If confidence doesn’t lift, the economy might need a bit more monetary support.” 

Suren Thiru, ICAEW Economics Director said “This interest rate cut is a particularly welcome early Christmas present for those households being squeezed by high mortgage bills and businesses being besieged by skyrocketing costs. The decision suggests that rate-setters are prioritising action to help mitigate the impact of a deteriorating economy, despite the meeting minutes highlighting some lingering worries over inflation persistence.
 
“The tight vote split confirms that the committee remain reluctant interest rate cutters with November’s Budget likely to have helped tip the balance in favour of loosening policy, given it’ll likely dampen both inflation and growth.

“Though the pace of policy loosening may slow as it approaches what the Bank considers as the neutral rate, the speed at which economic conditions are crumbling may push policymakers to cut more aggressively, possibly as early as February.”

Federation of Small Businesses (FSB) Policy Chair, Tina McKenzie, said “The much-needed rate cut decision was prompted by faltering growth, and is just part of what is required to get the economy back on track, with much more still to be done.

“Small businesses’ importance to the growth agenda cannot be overstated. Without small firms making plans to invest, hire, expand, and innovate, the whole system gets gummed up, and growth grinds to a halt. The King’s Speech next spring is an opportunity for the Government to take bold action to help small firms on a number of fronts.

“Right now, small business confidence is very low, which is really worrying when we’re in the middle of what should be the busiest part of the year for many businesses, especially those in retail, hospitality and leisure.

“This latest base rate cut should be reflected in lower borrowing rates as soon as possible, but it has been disappointing to see a long lag or no reduction in loan costs at all following previous cuts, according to our research. High interest rates on commercial loans for small firms are deterring borrowing for growth.

“In addition, when business loan offers to small firms almost inevitably come with a personal guarantee attached, regardless of the size of the loan, this acts as a constraint on risk-taking and expansion plans, making us all poorer in the long run.

“The base rate cut is a bit of good news for small firms, but in the bigger picture it’s more akin to an orange in the stocking than a new games console under the tree – welcome, but not enough by itself to cause shrieks of joy on Christmas morning.”