The Bank of England (BoE) cut its key interest rate to 3.75 percent on Thursday after UK inflation eased faster than expected and as the economy weakens.

"We've passed the recent peak in inflation and it has continued to fall, so we have cut interest rates," BoE governor Andrew Bailey said.

The widely expected quarter-point reduction followed a regular policy meeting.

Expectations for the reduction were cemented by official data Wednesday showing Britain's annual inflation rate had slowed more than expected to 3.2 percent in November.

Analysts forecast the BoE to cut borrowing costs further next year with UK inflation set to move closer to the central bank's two-percent target.

Thursday's decision marks the sixth reduction since the BoE began a trimming cycle in August 2024, one month after Britain's Labour party won a general election.

In a close result, policymakers including Bailey voted 5-4 for a cut Thursday. Four members of the Monetary Policy Committee voted to hold borrowing costs at 4.0 percent.

"We still think rates are on a gradual path downward," Bailey said. "But with every cut we make, how much further we go becomes a closer call."

The central bank last cut its key interest rate in August amid concerns over the impact of US tariffs on the UK economy.

A cut to interest rates eases pressure on Prime Minister Keir Starmer, who has struggled to revive Britain's sluggish economy since Labour came to power in July 2024.

While a cut to the interest rate can help individuals and businesses taking out loans, it reduces returns on savings deposited in banks. (AFP)