Bank of England makes its decision on UK interest rates

The move was widely expected by the markets and it’s the second time this year that policy makers have reduced borrowing costs.

The Monetary Policy Committee (MPC) – the committee responsible for deciding the rate – voted by a majority of eight to one to reduce the bank rate by 0.25 percentage points with one member preferring to keep the bank rate at 5%.

Bank of England Governor Andrew Bailey said of the decision: “Inflation is just below our 2% target and we have been able to cut interest rates again today. We need to make sure inflation stays close to target, so we can’t cut interest rates too quickly or by too much. But if the economy evolves as we expect it’s likely that interest rates will continue to fall gradually from here.”

The decision comes as inflation was recently shown to have fallen to its lowest level in more than three years. In the year to September, inflation stood at 1.7%, its lowest level since April 2021 and below the central bank’s target rate of 2%.

It follows the first Budget given by Chancellor Rachel Reeves announcing around £70bn (€84bn) of extra government spending, funded through increased business taxes and borrowing.

Economists believe the spending, coupled with the prospect of businesses cushioning the tax hikes by raising prices, could lead to higher inflation next year.

Trump’s tariffs could have inflationary effect

The rate decision comes a day after former President Donald Trump was declared the winner of the US presidential election. The President-elect has indicated that he will cut taxes and introduce tariffs on certain imported goods when he returns to the White House in January. 

If he decides to do that, there may be an inflationary effect both in the US and globally. That, in turn, is likely to prompt the Bank of England’s MPC to take a more cautious approach towards cutting interest rates further.