The Bank of England voted 5-4 to cut interest rates by 25 basis points to 3.75%, as expected, at its final meeting of the year earlier today, Thursday, December 18th. This follows the bank’s decision to keep rates unchanged at the previous two meetings. Four members voted to maintain the current rate.

The Bank’s interest rate report stated that inflation has fallen to 3.2% since the previous meeting. While this is above the 2% target, it is expected to return to the target at a faster pace in the near term. Reflecting the restrictive monetary policy and in line with indicators of slowing growth and a tightening labor market, wage growth and service price inflation have continued to decline.

The extent of further monetary easing will depend on the evolution of inflation expectations. Monetary policy has already been tightened, with interest rates cut by 150 basis points since August 2024. It is likely that interest rates will continue their gradual downward trajectory, but determining the extent of further monetary easing will become more difficult.