The Bank of England (BoE) is widely expected to reduce interest rates on Thursday, 19 December, after a sharp slowdown in UK inflation and a weakening in economic growth. However, a string of further cuts next year, in 2026, seems unlikely given Britain’s lingering price pressures.
Investors believe that the BoE will reduce its benchmark interest rate to 3.75% from the current 4%, marking a fourth rate cut during 2025. This comes as welcome news for Finance Minister Rachel Reeves and Prime Minister Keir Starmer as they struggle to meet promises to voters of quicker economic growth.
The quarter-point cut is likely to take the Bank Rate to its lowest level in nearly three years. However, it would still be almost double the equivalent rate of the European Central Bank (ECB).
British inflation remains the highest among the Group of Seven (G7) economies, partly because of Reeves’ decision last year to increase taxes on employers. This is despite inflation falling sharply to 3.2%, according to official data released on Thursday, 18 December.
Investors are fully pricing in only one more BoE rate cut in 2026, which is expected to materialise by the end of April, based on market expectations. In addition, bets on a second rate cut increased after the November inflation decline, according to financial market analysis.
Hetal Mehta, Chief Economist at wealth management firm St. James’s Place, said the different camps on the BoE’s Monetary Policy Committee (MPC) were unlikely to shift significantly from their medium-term stances this week.
Mehta added that there is enough ambiguity in the economic data heading into the new year to rule out back-to-back rate cuts, noting that while the data confirms the direction of travel, it is the magnitude of future rate cuts that remains under debate.
The nine members of the MPC have been almost evenly split in recent months. In November, they voted 5–4 to keep interest rates on hold
