The Bank of England has cut interest rates to 3.75% to aid a struggling economy, but the UK continues to face a unique challenge on the global stage. Independent forecasters, including the International Monetary Fund (IMF), have warned that UK consumers are likely to suffer the highest inflation rates among all G7 major economies for both this year and the next.
This grim international context shadowed the Bank’s announcement. While domestic inflation has fallen to 3.2%, it remains significantly higher than the 2% target. The persistence of high prices in Britain compared to peers like the US or Germany suggests structural issues that a simple rate cut may not solve. “One-off shocks,” such as the recent rise in employer national insurance contributions, were cited by the Bank as factors restraining progress.
The decision to cut rates was a close call, passing by just one vote. The committee is trying to stimulate growth—GDP has been flat or shrinking for four months—without adding fuel to the inflationary fire. However, the external members of the MPC who supported the cut argued that the UK is at risk of an “economic downturn,” which they believe will naturally dampen prices more effectively than high rates.
Chancellor Rachel Reeves welcomed the cut as a necessary boost for families, but the G7 comparison remains a thorn in the government’s side. While borrowing is now slightly cheaper, the cost of living remains stubbornly high relative to other advanced nations. The Bank expects inflation to dip closer to target in early 2026, but the UK’s path to stability appears longer and rockier than its neighbors’.
As the UK heads into 2026, the focus will be on whether the country can shed its status as the G7 outlier. If domestic inflation proves more resilient than in other countries, the Bank of England may be forced to keep rates higher for longer than the Federal Reserve or the ECB, putting British businesses at a competitive disadvantage.