Interest rate cuts and slower inflation are giving the British a breathing space

The British economy ended the year with a pause.

Bank of England policymakers cut interest rates by a quarter point to 3.75 percent on Thursday after inflation slowed more than economists expected.

The central bank had held interest rates steady at its two previous meetings amid concerns about persistently high inflation. Data released on Wednesday eased those fears, particularly for Andrew Bailey, the bank’s governor. Consumer prices rose 3.2 percent in November compared to the same period last year, compared with 3.6 percent in the previous month.

“We have passed the recent peak in inflation and it has continued to fall, making it the sixth time we have cut interest rates in the last year and a half,” Mr Bailey said in a statement.

For months there has been an almost even split of opinion on the Bank of England’s nine-member interest rate committee. One camp was concerned about weakening demand in the economy and worried about signs of a lack of confidence, such as high household savings rates. The other was concerned that the recent period of high inflation has changed the way consumers and businesses think about prices, potentially feeding higher inflation expectations into their behavior.

Mr. Bailey recently served as a swing vote. This week he broke the deadlock again, casting one in five votes in favor of cutting rates, while four voted to leave rates unchanged.

“We still believe interest rates are on a gradual downward trend,” Mr. Bailey said. “But with every cut we make, how far we get becomes more and more important.”

Central bankers around the world made their final decisions for the year this week and last. On Thursday, the European Central Bank kept interest rates steady as inflation hovers near the bank’s 2 percent target. On Friday, the Bank of Japan is expected to raise interest rates to their highest in three decades as persistent inflation has dampened consumer spending.

Last week, the Federal Reserve cut interest rates for the third time in a row – a highly controversial decision. U.S. policymakers are divided over how far to further cut borrowing costs given the risk of rising unemployment and stubborn inflation.

In Britain, policymakers said inflation would fall faster than expected in the near term as relatively high interest rates constrained the economy, growth was “subdued” and the labor market eased. The unemployment rate recently rose to 5.1 percent, the highest level in five years.

The rate cut was welcomed by the government, which said it wanted to help reduce inflation and was aware that households were struggling due to the high cost of living. Finance Minister Rachel Reeves said in her annual budget last month she would cut household electricity bills and freeze rail fares.

On Thursday, Ms Reeves called the rate cut “good news” for mortgage holders and businesses with loans. “But I know there is more to be done to help families with living expenses,” she added in a statement.

Many economists assess the prospects for the British economy as mediocre.

Inflation is not expected to return to the bank’s target of 2 percent until 2027. This year, economic growth was strongly supported by public spending, but private investment and consumer spending were subdued. If this dynamic continues next year, the UK economy could struggle but remains vulnerable to shocks.

“There needs to be some stimulus for the private sector soon or the economy will slow dramatically,” said Andrew Goodwin, chief UK economist at Oxford Economics.

The Organization for Economic Co-operation and Development recently forecast that the UK economy will grow by 1.2 percent next year, compared to 1.4 percent this year. Last year the government increased taxes, particularly on businesses, and this year announced it would take steps to raise more money from income tax. The increase in government spending is also expected to slow.

The British government, led by the Labor Party, has struggled to establish a positive narrative about the economy. This week it was announced that a workers’ rights law would soon come into effect and that the country had reached a trade deal with South Korea. But economists are paying attention to other measures aimed at areas such as faster housing construction and the development of infrastructure projects.

Rob Wood, chief U.K. economist at Pantheon Macroeconomics, said in an analyst note that he expected central bank policymakers to cut interest rates again in April, but it would be a “hard-fought decision” that could be offset by stubbornly high wage growth.

He added that Mr Bailey’s comments suggested the hurdle for another rate cut was high.

Mr Bailey said in minutes from this week’s monetary policy meeting that he saw “room for further policy easing” but that the path of interest rates “cannot be accurately predicted” as they approach the neutral rate, where the Bank’s policies neither stimulate nor slow the economy.