The Bank of England lowered Bank Rate to 3.75% on Thursday 18 December after a tight 5–4 vote, taking borrowing costs to their lowest level in almost three years. The move follows a further cooling in price growth, with CPI at 3.2% in November, according to the Office for National Statistics.

Governor Andrew Bailey signalled the easing cycle is likely to continue but with more debate around each step. Having supported a hold in November, he switched to cut this month and said future moves would be “a closer call”. That reflects concern about still‑elevated services inflation and pay growth even as headline pressures fade.

Threadneedle Street’s guidance now points to headline inflation hovering near 2% between April and June 2026, earlier than it thought only a month ago. Officials say November’s Budget measures will also push down on near‑term inflation, with the Treasury citing an OBR estimate of around a 0.4 percentage point reduction next year.

The near‑term growth picture remains weak. The Bank expects zero GDP growth in the final quarter of 2025, while the jobless rate has risen to 5.1% on the August–October measure, signalling a softer labour market. Both factors help explain the knife‑edge vote.

For households, the impact lands fastest on variable mortgages. UK Finance estimates a typical tracker borrower will see payments fall by about £28.77 a month after a 0.25 percentage point move, with standard variable‑rate customers saving around £13.88 if lenders pass on the cut. About 533,000 tracker and 509,000 SVR loans were outstanding in mid‑2025.

Most borrowers are on fixed deals, so relief arrives as lenders reprice. Early indications suggest fixed‑rate offers are set to edge lower into January as funding costs ease and competition picks up, with short‑dated fixes already in the mid‑3s.

SMEs should see modest relief on overdrafts and floating‑rate loans. As a simple rule of thumb, a 0.25 percentage point cut trims interest by roughly £52 a month on a £250,000 variable facility. Helpful, yes-but the Bank’s message is that policy will ease gradually rather than reset quickly.

On‑the‑ground intelligence from the Bank’s regional Agents still describes a flat economy, cautious consumers and tight margins. Retailers report little volume growth and customers laser‑focused on value, while firms are holding off major investment until well into 2026.

Hospitality remains fragile. The Agents note shorter stays, later bookings and lower spend per visit in restaurants, with operators relying on discounts and delaying price rises given affordability concerns.

Savers should expect deposit rates to drift lower, though pass‑through tends to be slower than on mortgages. Consumer finance guides note easy‑access rates often step down after a base‑rate cut, while fixed bonds can hold up longer as banks compete for funding.

Fiscal policy is working alongside monetary easing. The Autumn Budget froze regulated rail fares and prescription charges for 2026, extended the fuel duty freeze, and set out changes that will remove an average of £150 from household energy bills from April 2026 by shifting some policy costs onto general taxation-measures the Treasury says the OBR judges will lower CPI next year.

What to watch next: the next MPC decision falls on Thursday 5 February 2026. A Reuters poll before today’s meeting pointed to another cut in Q1, and Capital Economics says Bank Rate could reach 3.0% over 2026 if inflation keeps surprising on the downside-even as the Bank stresses that each move from here will be a closer call.