The Bank of England cut interest rates to 3.75% from 4% in its final policy decision of 2025, taking borrowing costs to their lowest level in almost three years but exposing deep divisions among policymakers over the outlook for further easing.
The decision was split 5-4 between members of the Monetary Policy Committee, leaving borrowers and markets uncertain over whether 2026 will bring further cuts or continued caution.
In a statement, the central bank said the pace and extent of further easing would depend on the inflation outlook, noting that policy had already become significantly less restrictive. “The restrictiveness of policy has fallen as bank rate has been reduced by 150 basis points since August 2024,” it said. “On the basis of the current evidence, bank rate is likely to continue on a gradual downward path. But judgments around further policy easing will become a closer call.”
Money markets are signalling that rates could fall to 3.5% by April, with a 78% probability of a cut to 3.25% by November. The December move marked the sixth rate cut since August 2024, bringing the bank rate down from 5.25% to 3.75%.
Economists broadly expect further easing in the coming year, though views differ as to how quickly rates will fall. Sanjay Raja, Deutsche Bank’s chief UK economist, said: “More rate cuts will likely follow in 2026. But much will depend on forward-looking indicators of price pressures – including firms’ CPI expectations, price expectations, and wage expectations – and the evolution of the labour market.
“Lingering weakness in the quantities side of the labour market could elicit a more dovish reaction function in 2026.”
Read more: FTSE 100 best performing stocks of 2025
Neil Wilson, a Saxo UK investor strategist, said: “Inflation is coming down just as the economy is on life-support, so further cuts in February and April should be expected, with ultimately a 3% bank rate at the end of this easing cycle.”
Others urged caution. Sylvain Broyer, an economist at S&P Global Ratings, said: “With real wages still racing ahead of productivity, underlying price pressure is not tamed, curbing room for more easing. We see scope for just one more cut before spring 2026.”
Capital Economics expects the MPC to cut rates to 3% in 2026, below the 3.5% priced by markets, forecasting inflation will return to the central bank’s 2% target by the end of 2026, a faster and deeper fall than widely expected.
Sonali Punhani, a UK economist at Bank of America, said: “We expect further quarterly cuts in 2026 in March or June with risks of April or July to 3.25% – more easing than market has currently priced in.” The bank warned that fiscal tightening and policies to lower energy bills left the door open for gradual easing, adding: “Lower inflation via energy bills is a one-off, but it can lower inflation and wage expectations and rein in potential second round effects.”