18 December 2025: Bank of England set to cut rate as UK inflation slides

A rate cut is very much on the cards later today following this week's employment and inflation data. Following a five-year high in the number of jobless, inflation fell to 3.2% over the twelve months to November. This was below the Bank of England's own prediction and the expectations of the majority of the financial market.

Lower food prices, which traditionally rise at this time of the year, were the main driver of the fall, with decreases seen particularly for cakes, biscuits, and breakfast cereals, as well as their constituent ingredients like flour, sugar and dried fruit.

Tobacco prices also helped pull inflation down, with prices easing slightly this month after a significant rise a year ago. The fall in the cost of women’s clothing was another downward driver.

Analysts said a cut in the Bank’s base rate was “all-but nailed on” before its policymakers meeting later today, as faltering economic growth and rising levels of unemployment bear down on inflationary pressures. The danger now is that the BoE keeps its policy too tight for too long. No growth since summer, a rapid cooling of the labour market, elevated household savings, and a sluggish housing market are all obvious signs of tight money.

While the inflation figures would have made pleasant reading for the Chancellor over her morning coffee, she will still need to find a spark to bolster economic growth, since the likely rate cut will only take her so far.

Andrew Bailey, Governor of the Bank of England, said he needed to see more evidence of “durable” disinflation before cutting interest rates again this year. This week’s publication of official inflation and unemployment figures has provided the prompt he needed.

Bailey is joined around the MPC’s table by four consistent doves and four hawks. The employment data will have reinforced the doves’ case for lowering rates to increase monetary stimulus. The hawks will argue that there is still latent inflation in the system, which could be reignited if rates are cut again for the fourth time this year.

As the new year beckons, the Prime Minister will begin to realise that his Chancellor is becoming a hindrance to his Party’s chances of reelection. Rachel Reeves is in the spotlight and under enormous pressure after her autumn Budget, amid accusations of misleading the public on the scale of the fiscal challenge, chaotic leaks, and a bruising political fallout. She remains a central figure in ongoing economic debates as 2025 draws to a close.

There is just one obvious candidate to replace Ms Reeves should Sir Keir Starmer decide to go down that route. Pat McFadden is a veteran of the New Labour era. He served as a key advisor to Tony Blair before entering Parliament in 2005 and has since held a range of senior economic and business roles. Currently serving as Chancellor of the Duchy of Lancaster and a close confidant of Keir Starmer, Mr McFadden is the bookmakers' clear favourite. His extensive government experience and reputation as a safe, trusted operator make him the leading choice for stabilising the Treasury amid ongoing economic pressures.

The pound lost ground yesterday following the inflation data, but recovered from a low of 1.3311 to close at 1.3378.

Fed Governor Christopher Waller may well have been “talking his own book yesterday by telling reporters that he can see a case for cutting rates by 100 basis points on the horizon. Even so, since he appears to be out of the running to replace Jerome Powell as Chairman of the Federal Reserve, his words will have had significant meaning for the doves on the FOMC.

"I still think we're probably, maybe we're 50 to 100 basis points off of neutral," which means the Fed still has room to cut interest rates if it needs to, Waller said at the Yale School of Management CEO Summit in New York. The question remains: how great is that need, and how much is driven by political influence?

Waller’s colleagues on the Committee, particularly those who hold the Presidencies of the twelve Regional Federal Reserves, have a different view on where interest rates are currently.

Federal Reserve Bank of New York President John Williams said that he projects the jobless rate will come back down over the next few years at an event on Monday, even though he sees room for more rate cuts in the short term. He wants to ensure that both parts of the Central Bank’s mandate are considered equally.

Meanwhile, Federal Reserve Bank of Atlanta’s President, Raphael Bostic, who retires later this year, believes that GDP growth is solid and that he expects to see that continuing in 2026 in Georgia. He went on to say that he hopes a stronger economy will take pressure off the job market, while Fed policy won't help with structural employment changes. It's a close call, but inflation is more worrying than jobs.

Last week, at its final scheduled meeting for 2025, the Federal Open Market Committee of the Federal Reserve voted to lower the Federal Funds rate for a third consecutive time by a quarter of a percentage point, bringing it to a range of 3.5% to 3.75%.

The economy is flashing new warning signs, as the labour market shed jobs over October and November, and the unemployment rate ticked up to 4.6%, the highest level since 2021.

Job gains of 64,000 in November exceeded expectations, but only partially offset the 105,000 jobs lost in October. Those losses, the sharpest since the COVID-19 pandemic-era recession, reflected the exit of tens of thousands of federal workers who took a redundancy package earlier this year.

These reports show overall stagnant growth, ”according to a prominent recruiter. This really points to the challenges in the policy landscape that businesses are going up against: tariffs, geopolitical uncertainty, and inflation that’s staying really stubborn.”

Yesterday, the dollar index regained most of the ground it had lost over the past week. It climbed to a high of 98.64 but fell back to close at 98.40.

Talk of the next move in Eurozone interest rates being a hike has taken the market by storm. Unfortunately, several market participants and commentators have ignored that, everyone from Isabel Schnabel, who made the original comment, to market traders who are at the sharp end of the common currency's direction, no move in rates is expected in the short or medium term. Indeed, a change to the official rate may not be needed in 2026.

Eurozone inflation held steady at 2.1 percent in November, revised data showed yesterday, reinforcing expectations the European Central Bank will keep rates unchanged this week and for some time to come.

The initial estimate by the EU’s statistics agency showed annual inflation in the single currency area ticking up to 2.2 percent, moving away from the bank’s 2 percent target.

The revision reflects smaller-than-expected November price increases for some components, notably unprocessed food and industrial goods excluding energy.

Core inflation, which strips out volatile energy and food prices and is closely watched by analysts, was confirmed at 2.4%, unchanged from October. The updated figures, showing eurozone inflation still in check, will bolster economists’ forecasts that the ECB is set to hold rates steady at its policy meeting later today. Following a year-long series of cuts, the Central Bank for the 20 countries that use the Euro has kept its key deposit rate at 2% since July.

Comments from Eurozone Heads of State calling for the Central Bank’s mandate to be widened to include growth and job creation have been widely praised. French President Macron initially raised the idea, and several of his colleagues have supported it.

It is doubtful that the revision will be discussed officially today since the agenda is set well in advance; however, it is sure to be aired by technocrats on the periphery of the meeting.

The Euro gave back some of its recent gains yesterday, but interestingly, “bounced off” the 1.17 level, which had proved to be resistance during the currency’s recent rally. It reached a high of 1.1758 and closed at 1.1739.

Have a great day!