Overview
This cut had courtroom drama energy. The Bank of England dropped rates to 3.75%—but only because Governor Andrew Bailey switched his vote and made it 5–4. The immediate market read was hawkish-by-UK-standards: sterling rose and gilt yields ticked higher as traders pared back expectations for rapid 2026 easing.
Now the fight moves from the committee room to transmission. Lenders began announcing how quickly they’ll pass the cut through to tracker and variable borrowers, while fixed-rate pricing stays hostage to swap rates and the MPC’s internal split over whether “neutral” is closer to ~3% (the doves’ story) or higher (the hawks’ story).
Key Indicators
People Involved
Organizations Involved
The UK central bank, trying to land inflation at 2% without breaking a stagnating economy.
A nine-member panel whose internal split is now shaping UK financial conditions as much as the headline rate.
The UK finance ministry whose fiscal choices are altering the BoE’s near-term inflation path and medium-term growth risks.
The UK’s official data agency, providing the inflation and jobs numbers the MPC is fighting over.
Timeline
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Virgin Money rolls out updated tracker pricing linked to the new 3.75% base rate
TransmissionVirgin Money said updated tracker rates reflecting the new Bank Rate would be available from Dec. 19, with tracker margins unchanged.
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Mortgage pass-through begins: Nationwide cuts SVR and trackers; Virgin Money/Clydesdale outline repricing dates
TransmissionNationwide said its standard mortgage rate would fall by 25 bps (effective 2026-01-01) and tracker borrowers would see the base-rate-linked reduction; Virgin Money/Clydesdale set variable-rate cuts for mid-January.
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Markets treat the cut as cautious: sterling and gilt yields rise
MarketSterling strengthened and gilt yields rose as investors interpreted the MPC’s “closer call” guidance as limiting the pace of further cuts.
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Bailey breaks the tie: Bank Rate cut to 3.75%
DecisionThe BoE cuts 25 bps to 3.75% on a 5–4 vote. Officials stress “gradual” cuts, but warn each step down is a closer call as they near neutral.
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Autumn Budget lands in the middle of the rate debate
PolicyThe government’s budget becomes a direct input into the BoE’s inflation and growth projections for 2026–2028.
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Another pause: 5–4 hold at 4.00%
DecisionThe MPC holds at 4.00% again, but the minority for an immediate cut grows louder.
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Pause: Bank Rate held at 4.00%, QT slowed
DecisionThe MPC holds at 4.00% (7–2) and votes to reduce the pace of gilt sales over the next year.
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Fifth cut: Bank Rate to 4.00% after a procedural knife-edge
DecisionThe MPC cuts to 4.00% via a two-step vote after an initial split including a call for a larger cut.
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Fourth cut: Bank Rate to 4.25%
DecisionA narrow 5–4 vote cuts rates again as the Bank highlights two-sided risks: persistence vs weak demand.
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Third cut: Bank Rate to 4.50%
DecisionThe MPC cuts to 4.50% (7–2) amid weaker growth, loosening labour conditions, and ongoing disinflation.
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Second cut: Bank Rate to 4.75%
DecisionThe MPC votes 8–1 to cut to 4.75% as disinflation progresses but domestic pressures linger.
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The first cut: BoE starts easing
DecisionThe MPC cuts Bank Rate by 25 bps to 5.00% on a 5–4 vote, beginning the easing cycle.
Scenarios
BoE Keeps Cutting—Bank Rate Heads Toward ~3.25% in 2026
Discussed by: Financial Times coverage, Reuters polling and market commentary, and major-bank economist notes cited by UK business press
If services inflation and wage growth keep easing and the labour market continues to loosen, the majority can argue the “disinflation process” is durable. That sets up a steady cadence of cuts through 2026, with the committee aiming to reach a neutral-ish zone without sparking another inflation flare-up. The trigger is boring but decisive: several months where wage expectations soften, services inflation drifts lower, and activity data stays weak enough to justify continued easing.
The Hawks Win the Timing Fight—Cuts Pause After One More Move
Discussed by: BoE minutes language about a “closer call,” plus commentary in Reuters and UK press highlighting the hawkish bloc’s persistence concerns
The minority’s case becomes the majority’s if forward-looking wage indicators stay elevated and services inflation stalls—especially if sterling weakness or energy-price moves re-ignite headline inflation. In that world, the Bank delivers perhaps one additional cut, then pauses for multiple meetings to protect credibility. The trigger is a plateau in wage expectations and sticky services prices that makes 2% look achievable only with policy kept restrictive longer.
Inflation Re-Bites—BoE Forced to Halt Easing and Talk Tough Again
Discussed by: The hawkish MPC members’ stated concerns about structural inflation persistence and expectations, amplified by market strategists when data re-accelerates
This is the ugly tail risk: demand doesn’t recover much, but inflation stays high anyway—because of structural wage-price dynamics, fiscal/tax effects, or renewed external price shocks. The Bank stops cutting abruptly and signals it’s willing to hold rates higher for longer, even as growth is flat. The trigger is a clear re-acceleration in services inflation and wage growth that pushes medium-term inflation expectations up.
Historical Context
Post-Brexit Vote Shock: BoE cuts to 0.25% and deploys a policy package
2016-07 to 2016-08What Happened
After the EU referendum, the Bank faced a classic central-bank trap: weaker growth outlook, weaker currency, and inflation pressure from sterling’s fall. It cut rates and paired the move with multiple tools to protect transmission and stabilize confidence.
Outcome
Short term: Financial conditions eased and the Bank bought time for the economy to adjust.
Long term: The episode became a template for combining rate policy with targeted support when shocks hit.
Why It's Relevant
It’s the closest modern UK example of easing into uncertainty—when inflation risks and growth risks point in opposite directions.
Global Financial Crisis: Bank Rate to 0.5% and QE begins
2008-10 to 2009-03What Happened
As output collapsed and credit markets seized, the Bank slashed rates rapidly toward the effective floor and launched asset purchases to keep the financial system functioning and support demand.
Outcome
Short term: Rates hit 0.5% and QE became a core stabilization tool.
Long term: The crisis redefined the UK’s monetary toolkit—and normalized unconventional policy in emergencies.
Why It's Relevant
It shows what a genuine growth emergency looks like—and why today’s MPC is cautious about declaring one prematurely.
Covid Crisis Response: emergency cuts to 0.1% and expanded asset purchases
2020-03What Happened
Facing a sudden stop in economic activity, the Bank pushed rates close to zero and expanded funding and asset purchases to prevent a credit crunch and limit lasting damage.
Outcome
Short term: Financial conditions were stabilized quickly despite extreme uncertainty.
Long term: Policy credibility increasingly hinged on managing the exit—especially once inflation later surged.
Why It's Relevant
It explains why the Bank is obsessed with expectations now: the exit from crisis policy helped set the stage for later inflation pain.