The Bank of England has cut interest rates in response to mounting signs of a prolonged slowdown in the labour market.
Policymakers reduced Bank Rate to 3.75% from 4% and warned that the economy is likely to stagnate following the impact of Rachel Reeves’s second Budget tax increases. The Bank now forecasts zero growth in the final three months of the year, downgraded from a previous estimate of 0.2%, describing economic conditions as “lacklustre”.
Governor Andrew Bailey cautioned that there is a growing risk of a sharper deterioration in the jobs market, with unemployment hovering near a five-year high. However, policymakers struck a more optimistic tone on inflation, saying the Budget is expected to weigh on prices and bring inflation close to the Bank’s 2% target as early as April. CPI inflation eased to 3.2% in November from 3.6% in October.
The decision exposed divisions within the Monetary Policy Committee, which voted 5–4 in favour of the cut, with Bailey casting the deciding vote. The move is expected to support a fresh wave of cheaper mortgage deals before the end of the year.
Some MPC members, however, remain uneasy about persistently strong wage growth that has not been matched by productivity gains. While Bailey said he was confident inflation has passed its recent peak, he stressed that the scope for further cuts is limited. “We still think rates are on a gradual path downwards,” he said, “but with every cut we make, how much further we go becomes a closer call.”
