The Bank of England delivered an early boost by cutting its key interest rate from 4% to 3.75%. This marks the fourth cut this year, following reductions in February, May, and August, and the sixth since Labour came to power last year. While intended to stimulate the struggling UK economy, the decision, made by a split vote within the Monetary Policy Committee (MPC), also highlighted continued concerns about persistent inflation.

For the majority of Britain's 8.4 million existing residential mortgage holders, numbering over 7.2 million (86%), monthly repayments will remain unchanged as they are on fixed-rate deals. However, the 533,000 homeowners with a base-rate tracker mortgage will directly benefit from lower borrowing costs, with their rates falling in line with the Bank's cut. UK Finance estimates a typical tracker-mortgage customer, with an outstanding balance of £138,000, will see monthly payments decrease by £28.77. The 509,000 borrowers on their lender’s standard variable rate (SVR) face uncertainty, as lenders are not obliged to reduce SVRs, although it is likely. If lenders pass on the cut fully, a typical SVR mortgage holder could save an estimated £13.88 a month.

Looking ahead, the cost of new fixed-rate mortgage deals has been on a downward trend, a movement expected to accelerate with this latest cut. This is positive news for homebuyers and those due to remortgage soon. Brokers anticipate a highly competitive market, with some suggesting two-year fixed rates could fall below 3% by spring. Currently, the average new two-year fix stands at 4.82%, but best rates for remortgaging with substantial equity are around 3.6%. Borrowers who secured an average two-year fixed rate in early 2024 at around 5.7% could potentially see their new payments halved. Those coming off two-year fixed-rate deals in 2026 are poised to be “biggest winners,” able to remortgage onto much lower rates. Similarly, borrowers whose five-year fixed deals are ending soon will also benefit from improved rates, though many might still experience a sharp rise in monthly payments compared to the 2.75% average for five-year fixes available in March 2021. Mortgage brokers advise booking rates up to six months in advance, with the flexibility to switch to a lower rate if available before completion.

On the savings front, while returns are not explicitly tied to the base rate, Thursday's reduction is likely to be passed on to many savers with easy-access accounts or other non-fixed interest rate products. Before the cut, the average easy-access savings rate was 2.56%, though “best buy” accounts offered up to 4.5%. Fixed-rate savings bonds, which involve tying up money for six months to five years, typically offer the highest rates, with top one-year fixed deals paying a little over 4.5% on Thursday.

The Bank's nine-member MPC voted by five to four to implement the rate cut, reflecting a cautious approach amidst ongoing inflation concerns. The Bank now expects inflation to be “closer” to its 2% target in the first quarter of the new year. Governor Andrew Bailey noted that while the peak in inflation has passed and it continues to fall, making cuts for the sixth time, future decisions would be “closer calls” as rates continue on a “gradual path downward.” The cut was anticipated following official data showing inflation fell to an annual rate of 3.2% last month, from 3.6% in October, aided by weaker food prices, though still above the government's 2% target.

The four MPC members who voted against the cut expressed concerns about the persistent strength of inflation in the services sector and survey data indicating continued strong wage growth, suggesting inflation could be entrenched through “lasting changes in wage and price-setting behaviour.” Chief economist Clare Lombardelli highlighted “elevated wage growth” as a factor that might require slowing future policy easing, with employers expecting 3.5% pay growth in 2026. Conversely, the three internal members supporting the cut – Bailey, Sarah Breeden, and Dave Ramsden – believed “upside risks to inflation had continued to recede.” The two external members, Swati Dhingra and Alan Taylor, emphasized risks of an economic downturn, arguing that weak consumer spending and a slowdown in the labour market would naturally restrain inflation.

The rate cut was welcomed by Chancellor Rachel Reeves, who hailed it as the sixth since the election and the fastest pace of cuts in 17 years, expressing hope for families with mortgages and businesses with loans. She had previously announced inflation-fighting measures in her November budget partly aimed at giving the Bank more room to reduce rates. The MPC anticipates that these budget measures, including cuts to household energy bills, will reduce inflation in the first quarter of 2026 by about half a percentage point. Labour hopes that lower borrowing costs will boost confidence and economic growth. However, the General Secretary of the TUC, Paul Nowak, called for a “sequence of quickfire and substantial rate cuts,” deeming one cut “not enough for a fragile economy struggling with stagnant demand and failing confidence.” Recent economic data has been weak, with an unexpected 0.1% contraction in GDP in October, marking four months without growth. Bank forecasters now expect GDP to be flat in the final three months of 2025, after a slight expansion in the third quarter. Business groups attribute the economic slowdown partly to Reeves’s £25bn increase in employer national insurance contributions (NICs), which the Bank acknowledged as a “one-off shock” that had “restrained” the downward trend in inflation. Independent forecasters, including the International Monetary Fund, have previously indicated that UK consumers are likely to face the highest inflation rates among G7 major economies this year and next.