Will the new version of London revive Britain’s struggling economy?
The Bank of England’s Monetary Policy Committee voted at the end of its meeting today to cut its base interest rate from 4% to 3.75%, bringing the cost of borrowing in the country to its lowest level since early 2023.
The decision was made by a fragile vote of five members to four, and the bank’s official text emphasized that despite the rate cut, monetary policy remains restrictive and any further cuts in the coming months will depend on the data.
In its economic summary, the central bank announced that annual inflation reached about 3.2% in November, which is lower than last year’s peaks but still above the 2% target, and price pressures remain, especially in the services sector and some administrative and financial costs.
Meanwhile, signs of weak demand and a weakening labor market have become more pronounced, and according to the central bank itself, wage growth has slowed, the unemployment rate has reached about 5.1% and a new wave of layoffs has been recorded.
Official data showed that UK GDP grew by just 0.1% in the third quarter of 2025, and the economy shrank by 0.1% in October.
In a new report, the Bank of England forecast that GDP growth in the final quarter of the year will be effectively zero, with the economy moving away from potential capacity in terms of overall activity. Many analysts see this picture as more of a “creeping recession” than a short transition.
The Bank of England has said that while continued declines in inflation and some government fiscal measures could help bring inflation closer to its 2% target by 2026, there is still a risk of continued price pressures from high wage costs, recent increases in employer contributions and cyclical shocks to energy and taxes.
From the experts’ point of view, the risk of inflation persistence has somewhat decreased compared to previous months, but on the other hand, the risk of weak demand and low growth has become more pronounced, and today’s interest rate cut is an attempt to respond to this concern.
Although the interest rate cut is considered relatively positive news for indebted households and mortgage holders, experts believe that its impact in the short term is limited, because a large part of new and renewed loans in recent months have been priced based on the expectation of this reduction, and banks and credit institutions are also cautiously reducing loan rates.
In contrast, depositors and pensioners, who had benefited to some extent from higher bank interest rates in the past two years, must now adapt to a new period of lower returns, while the pressure on the cost of living continues to weigh.
Economic observers say that the quality of growth in the British economy remains problematic. According to analytical reports, the increase in GDP in recent years has been fueled by a combination of population growth, public sector spending, and some temporary factors rather than by a sustained productivity and investment boom, while per capita growth in output and business investment has been weak and volatile.
From this perspective, interest rate cuts alone cannot replace structural reforms in areas such as productivity, infrastructure, education, and industrial policy, and there is a risk that the economy will remain stuck in a prolonged period of low growth, high household debt, and persistent cost-of-living pressures.
Meanwhile, the political dimensions of the central bank’s decision for the Keir Starmer government cannot be ignored. The government, which came to power last year with the slogan of economic recovery and public service restoration, is now facing critics who say that the combination of contractionary fiscal policies, increased tax burden on businesses and budget constraints has also limited the central bank’s room for maneuver, and that the interest rate cut reflects concerns about continued weak growth and rising unemployment rather than a sign of confidence in the future.
Therefore, if the downward trend in inflation stops or another shock occurs in the area of global energy and food prices, the central bank may face a new dilemma in combining the two goals of “containment of inflation” and “supporting growth.
The fact is that since late 2021, the Bank of England has raised interest rates from near zero to around 5.25% with a series of consecutive increases in order to contain the wave of double-digit inflation. After inflation peaked, the reverse trend began in the summer of 2024, and with four cuts in 2025, the interest rate has now reached 3.75%.
Although this figure is lower compared to recent peaks, it is still higher than in many European economies and is a sign that the inflation crisis and chronic recession in the UK are not over yet, and the central bank’s prescription for getting out of this situation is under the microscope of public opinion and analysts more than ever.