Bank of England reduces interest rates to 3.75%

On 18 December 2025, the Bank of England announced that interest rates have been cut to 3.75%¹. The policyholder votes were split 5-4 in favour of lowering rates by 0.25% and the vote results suggest that further cuts are likely to be more contested in 2026.

However, the Bank of England did indicate that rates are “likely to continue on a gradual downward path”.

More caution is expected in future votes due to a combination of weak economic growth and rising unemployment figures. The unemployment rate reached the highest level since 2021, recorded at 5.1% from August to October 2025, and is expected to remain close to 5% throughout 2026.

Economic growth fell by 0.1% from August to October 2025, which was largely unexpected. Flat growth had been forecast by economists, but the fall is one of the key reasons why the Bank of England policymakers’ vote was such a close call.

Inflation level lowest in eight months

Inflation has fallen faster than predicted, with forecasts that the 2% inflation target could be met in 2026. November data revealed that inflation had slowed to 3.2%¹ over the previous 12 months. This marked the lowest level of inflation in the last eight months.

Outlook for homeowners and savers

The latest cut to 3.75% represents the lowest interest rates in almost three years and homeowners on tracker or standard variable rate mortgages will likely see a rate reduction to their monthly repayments.

An estimated 500,000¹ homeowners currently have mortgages that track the Bank of England base rate. The interest rate cut will deliver an average saving of £29 per month on repayments for those on tracker mortgages.

The majority of homeowners will see no immediate change, as they are on fixed rate mortgages. However, for those re-mortgaging in the near future, the available rates will be lower than the mortgage rates on the market since the peak in 2023. This means that homeowners on a two-year fixed rate may be able to switch to a lower deal in 2026.

The rates reduction should help first-time buyers with mortgage affordability and people who have been considering getting onto the property ladder will have some reassurance that the Bank of England expects gradual cuts to continue.

The interest rates cut is bad news for a large number of savers, who will likely see lower returns on variable rate savings.

Sources

1. https://www.bbc.co.uk/news/articles/cj01v7z73q1o

All the information in this article is correct as of the date of publishing. The opinions expressed in this publication are those of the authors Euxton Mortgage Market. The information provided in this article, including text, graphics and images does not, and is not intended to, substitute advice; instead, all information, content and materials available in this article are for general informational purposes only. Information in this article may not constitute the most up-to-date legal or other information.

YOUR HOME MAY BE REPOSSESSED IF YOU DO NOT KEEP UP REPAYMENTS ON YOUR MORTGAGE.

January 2026