Interest rates CUT to 3.75% to save economy from Labour slump

The Bank of England has delivered a Christmas boost to millions of borrowers with a cut in interest rates but warned of stagnating growth and a jobs downturn fuelled by Labour policies.

Rate-setters voted by a narrow 5-4 majority to cut rates from 4 per cent to 3.75 per cent – the sixth cut since the summer of last year – but flagged that further reductions would be a ‘closer call’.

It is the lowest level for Bank rate since early 2023.

The decision comes a day after official figures showed a sharper than expected drop in inflation to 3.2 per cent, an eight-month low.

And the Bank expects inflation to fall close to its 2 per cent target by April, nearly a year earlier than it had previously forecast.

Meanwhile it has downgraded its outlook for economic growth for the final quarter of this year from 0.2 per cent to zero.

But despite this weakness, rate-setters remain cautious about the prospects for inflation and whether they can cut rates further.

Bank governor Andrew Bailey said: ‘We’ve passed the recent peak in inflation and it has continued to fall, so we have cut interest rates for the sixth time, to 3.75 per cent.

‘Today, we still think rates are on a gradual path downward.

‘But with every cut we make, how much further we go becomes a closer call.’

The quarter point cut will provide a boost to more than a million borrowers on variable rate or tracker mortgages.

It will reduce the typical monthly payment on a tracker rate loan by £28.77 and a variable rate by £13.88. 

The Bank judged that measures in Rachel Reeves’s Budget including cuts to energy bills and changes to fuel duty would take half a percentage point off inflation in April.

But the wider economic picture has been worse than expected, with gross domestic product shrinking in October, prompting the Bank to cut its fourth quarter outlook.

And Mr Bailey signalled that, with the jobs picture darkening, the Bank was on the alert for gloom to deepen further.

He said: ‘While I do not yet see conclusive evidence of a sharper downturn in the labour market, we should be vigilant.’

Alan Taylor, a member of the Bank’s Monetary Policy Committee who was one of those who voted for a cut, said there were ‘worrying trends’ that could point to a ‘sharper non-linear deterioration in activity and the labour market’.

The Bank’s monthly survey of business conditions showed the Chancellor’s tax raising Budget as well as Labour’s workers’ rights bill were deterring hiring.

It said ‘significant headcount reductions’ had already taken place while just over half of employers it surveyed planned ‘to decrease rather than increase headcount’ next year.

And conditions have been grim on the high street as consumers ‘remain cautiuous and keenly focused on value for money’, the survey found.  

The Bank has now cut interest rates six times since August last year, lowering them from 5.25 per cent to the current level of 3.75 per cent. 

But progress has been far slower than expected due to concerns over stubbornly high inflation.

Those concerns eased yesterday with official figures showing inflation fell from 3.6 per cent in October to 3.2 per cent last month.

Although that is still well above the 2 per cent target, the Bank is now more worried about the parlous state of the economy under Labour.

While inflation is finally easing, the economy has been in decline since June and unemployment has raced from 4.1 per cent to 5.1 per cent since the election.

Shadow Chancellor Sir Mel Stride said: ‘Lower interest rates will be welcome news for many families – but rates are being cut despite inflation remaining well above target, thanks to rising unemployment and low growth under Labour.

‘This decision reflects growing concerns about the weakness of our economy. Labour’s choices have left us with the highest inflation in the G7, while the latest figures showed the economy shrinking and unemployment back to pandemic levels.

‘The economic mismanagement of Rachel Reeves has left the Bank of England with an impossible dilemma, balancing high inflation against a fragile economy.

‘Only the Conservatives have a leader with a backbone, a clear plan and a strong team to deliver a stronger economy.’

Suren Thiru, economics director at the ICAEW accountancy group, said the Bank was forced to act to prop up the ‘crumbling economy’.

He said: ‘This interest rate cut is a particularly welcome early Christmas present for those households being squeezed by high mortgage bills and businesses being besieged by skyrocketing costs.

‘The decision suggests that rate-setters are prioritising action to help mitigate the impact of a deteriorating economy, despite the meeting minutes highlighting some lingering worries over inflation persistence.

‘The tight vote split confirms that the committee remain reluctant interest rate cutters with November’s Budget likely to have helped tip the balance in favour of loosening policy, given it’ll likely dampen both inflation and growth.

‘Though the pace of policy loosening may slow as it approaches what the Bank considers as the neutral rate, the speed at which economic conditions are crumbling may push policymakers to cut more aggressively, possibly as early as February.’