Interest rates cut to 3.75% but further reductions to be 'closer call'
Michael RaceBusiness reporterGetty ImagesInterest rates have been cut to 3.75%, the lowest level in almost three years, but further reductions are set to be a "closer call", the Bank of England has said.In a knife-edge vote, policymakers voted 5-4 in favour to lower rates from 4% reflecting concerns over rising unemployment and weak economic growth.The Bank said rates were likely to continue to fall in the future, but warned judgements on further cuts next year would be more contested."We still think rates are on a gradual path downward but with every cut we make, how much further we go becomes a closer call," said the Bank's governor, Andrew Bailey.The decision to lower borrowing costs from 4% was widely expected, after figures this week showed inflation, the rate prices rise at, slowed further to 3.2% in the year to November.While the cut is likely to be good news for people looking to borrow cash or secure a mortgage, savers could see a reduction on their returns.The Bank said that, following the tax and spending policies announced in last month's Budget and easing oil and gas prices, it now forecast inflation to fall "closer to 2%" - the Bank's target - in the spring/summer of next year. Previously it did not expect this to happen until 2027.Chancellor Rachel Reeves announced the government would cut £150 off household energy bills in the Budget, as well as freeze fuel duty and rail fares.However, the Bank said weaker economic growth in November had led it to expect zero growth for the final few months of this year.It said information gathered from businesses around the country suggested a "lacklustre economy", with firms concerned by the speculation ahead of the Budget."Employment intentions are slightly negative," the Bank said. "More firms report not replacing leavers, looking for efficiency."The Bank said consumers remained "cautious and keenly focused on value for money" for goods, adding that food shops were "smaller than usual"."Some supermarkets have been concerned that the Budget will dampen spending on Christmas food and drink, but discounters say that early sales of lowered priced seasonal food are solid so far," it added.On Wednesday, figures from the Office for National Statistics showed the price of food was the main driver behind November's drop in inflation.The inflation rate has fallen in recent months, but this drop does not mean that prices are falling, rather they are rising at a slower rate.Mr Bailey reiterated that the Bank believed inflation had passed its peak.Reacting to the Bank's decision, the chancellor said it was the "sixth interest rate cut since the election - that's the fastest pace of cuts in 17 years, good news for families with mortgages and businesses with loans".But shadow chancellor Mel Stride said while lower interest rates would be "welcome news for many families", the cut reflected "growing concerns about the weakness of our economy"."The economic mismanagement of Rachel Reeves has left the Bank of England with an impossible dilemma, balancing high inflation against a fragile economy."EPAThe area around the Bank of England has a festive feel this time of year as Christmas lights adorn the Royal ExchangeThe Bank's main interest rate heavily influences the borrowing rates set by High Street banks for the likes of mortgages, loans and credits and also the returns given to savers.About 500,000 homeowners have a mortgage that "tracks" the Bank of England's rate. The 0.25 percentage point cut is likely to mean a typical reduction of £29 in monthly repayments.For the additional 500,000 homeowners on standard variable rates, monthly payments are likely to be cut by an average of £14, assuming lenders pass on the cut to their customers, as they typically have lower outstanding balances.The vast majority of mortgage customers have fixed-rate deals so are not affected by the latest decision, but rates on deals have been falling recently, owing to the expectation among lenders of a rate cut.Food price inflation is to remain higher this year before slowing in 2026, the Bank said, citing higher global agricultural prices.The Bank, which is independent of the government, sets interest rates in an attempt to try to keep consumer price rises under control.The theory behind increasing interest rates to tackle inflation is that by making borrowing more expensive, more people will cut back on spending and that leads to demand for goods falling and price rises easing.But it is a balancing act, as high interest rates can harm the economy as businesses hold off from investing in production and jobs.The government has made growing the economy its main priority as part of its efforts to boost living standards.In its most recent Monetary Policy Report, the Bank predicted UK economic growth would be 1.5% this year, but forecast it would fall to 1.2% next year before rising to 1.6% in 2027 and 1.8% in 2028.Get our flagship newsletter with all the headlines you need to start the day. 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