While inflation continues to cool down across the UK, the Bank of England decided to cut interest rates anyway, leaving many people scratching their heads about the timing. On December 17, 2025, the central bank reduced its main rate from 4% to 3.75%, bringing borrowing costs to their lowest point in nearly three years.
The Bank of England’s surprise rate cut amid cooling inflation has left economists puzzled about the central bank’s strategic timing.
The decision wasn’t unanimous though. Think of it like a close vote in your favorite reality show – five committee members said “yes” to the cut while four wanted to keep rates unchanged. This tight 5-4 split shows just how tricky the current economic situation really is.
So why cut rates when inflation is already falling? The answer lies in some worrying trends elsewhere in the economy. Unemployment keeps creeping higher, and economic growth has slowed to a crawl at just 0.1% in the third quarter of 2025. That’s much weaker than experts expected, like getting a D+ when you studied for a B.
The job market tells a concerning story too. More people are losing work, wages are growing more slowly, and businesses are getting nervous about hiring. Company closures are increasing, and business confidence remains stuck in the doldrums. Services price inflation also decreased to 4.4% in November from its peak earlier in the year.
Bank officials worry that weak demand from cautious households and businesses could actually push inflation below their target in the coming years. It’s a bit like overcorrecting when steering a car – sometimes fixing one problem creates another. Central banks typically aim for about 2.5% inflation annually to maintain economic health.
Looking ahead, the Bank expects to continue lowering rates gradually, but future decisions won’t be automatic. They want to see solid evidence that inflation stays under control before making more cuts. The committee estimates that a “neutral” interest rate sits around 3%, suggesting more cuts could be coming. Meanwhile, the Treasury is working on broader financial stability measures as it plans to regulate cryptocurrencies by 2027.
However, the close vote reveals deep uncertainty about what lies ahead. Some worry about cutting too much too fast, while others fear the economy needs more support now. With inflation expected to reach the target by late 2026, the Bank faces a delicate balancing act between supporting growth and maintaining price stability.
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