The Bank of England has announced a significant cut to its base interest rate, lowering it from 4% to 3.75%. This marks the sixth reduction since the general election and comes alongside stark warnings about the UK's economic prospects following Chancellor Rachel Reeves's Autumn Budget.
Economic Forecasts Slashed as Growth Stalls
In a major development for the UK economy, policymakers have dramatically revised their growth expectations. The Bank now projects zero growth for the final quarter of the financial year, a sharp downgrade from a previous estimate of 0.2% expansion. This revision represents a significant challenge for the government's economic strategy.
Governor Andrew Bailey issued a sobering assessment, highlighting the risk of a "sharper downturn" in the period ahead. He stated that while inflation has fallen from its recent peak, allowing for further rate cuts, the path forward remains finely balanced. "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," Bailey cautioned.
Political and Market Reaction to the Cut
Chancellor Rachel Reeves welcomed the decision, framing it as positive news for households and businesses. "This is 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," she said. Reeves pointed to measures in her recent Budget, including frozen rail fares and prescription charges, plus a planned £150 reduction on average energy bills next year, as further steps to ease cost-of-living pressures.
However, economists warn the Bank's ability to continue easing policy may be limited. Sylvain Broyer, an economist at S&P Global Ratings, noted that underlying price pressures persist. "With real wages still racing ahead of productivity, underlying price pressure is not tamed, curbing room for more easing," Broyer explained. His analysis suggests scope for just one more rate cut before spring 2026.
What This Means for the UK's Financial Future
The confluence of the rate cut and the slashed growth forecast paints a complex picture for the UK economy. While borrowers will benefit from lower borrowing costs, the threat of stagnation looms large. The Bank of England's actions indicate a delicate balancing act between supporting economic activity and guarding against persistent inflation.
The announcement, made on 18 December 2025, places renewed focus on the government's fiscal plans and their interaction with monetary policy. All eyes will now be on upcoming economic data to see if the Bank's cautious approach can steer a path away from the sharper downturn its Governor fears.
