19 December 2025: Inflation is expected to be close to 2% by May 2026

As predicted, it fell to Bank of England Governor Andrew Bailey to cast the vote that confirmed a fourth cut in the Bank’s base rate this year. Voting was as expected with Greene Lombardelli, Mann and Pill voting for the rate to stay at 4%, while Breedon, Dhingra, Ramsden and Taylor were in favour of a 25bp cut.

The move came a day after the Office for National Statistics reported that consumer price inflation slowed to 3.2 percent in the 12 months through November, from 3.6 percent a month earlier.

The figure was below the Bank of England’s forecast of 3.4 percent. That gave policymakers room to cut interest rates to bolster Britain’s stagnant economy. Statistics released earlier this week showed a weakening jobs market, with the number of job vacancies declining and the unemployment rate rising to 5.1 percent, the highest since January 2021.

“Unemployment, underemployment and flows from employment to unemployment have all risen,” Bank of England Governor Andrew Bailey said in a statement. “While I do not yet see conclusive evidence of a sharper downturn in the labour market, we should be vigilant.”

At his press conference following the announcement of the decision, Bailey told reporters that the expectation is that inflation will fall to the Bank’s 2% target in the coming Spring. He believes price rises have peaked and will decline gradually. Some of his colleagues are less convinced, but they have yet to make any public comment.

Bailey believes the Bank will be able to cut interest rates further in the coming months, although the vote is likely to remain close.

The decision was welcomed by the Chancellor, who told reporters that an average floating-rate mortgage will now cost £100 less per month.

The decision comes after official figures showed Consumer Prices Index (CPI) inflation fell sharply to 3.2% in November, from 3.6% in October.

Minutes of the MPC’s meeting read: “This was above the 2% target but, following the Budget announcements on administered prices and indirect taxes, headline inflation was now expected to fall back more quickly in April, to closer to 2%.”

The pound fell to a low of 1.3341 but recovered to close virtually unchanged at 1.3378. Traders are now well into their Christmas lull, with liquidity in short supply. When the market resumes trading following the Holiday, Sterling will come under pressure given the more dovish interest rate outlook.

A report released by the Federal Reserve Bank of Philadelphia yesterday unexpectedly showed a notable decrease in its December reading of regional manufacturing activity.

The Philly Fed said its index of current activity slumped to -10.2 in December from -1.7 in November, which represents a significant contraction. Economists had expected the index to climb to a positive 3.0.

While the headline index remained in negative territory for the third consecutive month, the report showed significant turnarounds by new orders and shipments.

The new orders index surged to a +5.0 in December from -8.6 in November, while the shipments index rose to +3.2 in December from -8.7 in November, although these are the most volatile parts of the report.

The report also said the number of employees index jumped to 12.9 in December from 6.0 in November, reaching its highest level since May.

Looking ahead, the Philly Fed said most of the survey's future indicators softened but continued to suggest widespread expectations for growth over the next six months.

The report said the diffusion index for future general activity slid to 41.6 in December from 49.6 in November, marking its first decrease since June.

Federal Reserve Chair Jerome Powell said last week that the central bank would look at the latest inflation report with a “sceptical eye" because of possible distortions. Inflation cooled to an annual rate of 2.7% in November, the lowest price rise since July, a boost for President Donald Trump as he aims to make his case to voters struggling with the high cost of living.

The Labour Department's report shows that prices for many goods rose more slowly than expected, an encouraging sign that tariffs aren’t causing significant spikes. However, the data also covers the period that includes Black Friday discounts. These provide the distortions Powell was referring to.

“Inflation continues to fall, wages continue to rise, and America is trending towards a historic economic boom,” White House press secretary Karoline Leavitt said in a statement. “Americans can expect this trend of lower prices and bigger pay cheques to continue into the New Year!” Some economists warned that the release, delayed by the lengthy government shutdown, could be distorted by difficulties in collecting data.

It remains to be seen how influential the data will be for the FOMC, since its most recent rate cuts have been delivered against a hawkish background.

Data for existing home sales is due for release later today. This will likely show that confidence is gradually returning, as interest rates now appear to be on a downward path.

The dollar index has regained a little of its composure over the past couple of sessions, despite the recent rate cut and the fall in inflation. It reached a high of 98.56 yesterday and closed at 98.44.

The European Central Bank left all three of its key interest rates unchanged, ECB President Christine Lagarde said at a press conference in Frankfurt following a meeting of the Governing Council.

She said the current assessment confirms that eurozone inflation is set to stabilise around the ECB's 2% target over the medium term. Updated ECB projections see inflation averaging 2.1% in 2025, 1.9% in 2026 and 1.8% in 2027, before returning to 2% in 2028. Economic growth has exceeded expectations and is expected to be supported by domestic demand, investment and a resilient labour market. Growth is forecast at 1.4% in 2025, 1.2% in 2026, and 1.4% in both 2027 and 2028.

Lagarde stressed that the ECB will continue to follow a data-dependent approach and will not pre-commit to a specific path for interest rates. She said the Central Bank is "in a good position," but may take various actions amid high uncertainty stemming from geopolitics, trade, and wage dynamics.

She also noted an increase in investment, including in areas related to the adoption of artificial intelligence. She reaffirmed that the ECB stands ready to adjust all its tools as necessary to ensure price stability.

After Isabel Schnabel’s remarks, published last week, revealing ambitions to succeed to the helm of the ECB, its current chief was questioned by reporters in Frankfurt about what the rules are. Lagarde said the matter had been examined twice since the Euro was created.

Lagarde said lawyers previously reckoned that a serving European Central Bank Executive Board member would be ineligible for the presidency, but she called for more study on the matter.

Lagarde’s remarks offer a rare public glimpse of private legal advice involving the ECB at a time when a revamp of the board has just kicked off. That will ultimately lead to the settlement of her own succession within less than two years.

Both times lawyers studied the issue concerned the possibility of fellow French citizens holding the presidency. One was Christian Noyer, the ECB’s vice president at the time, and the other was Benoît Cœuré, a potential candidate to replace her predecessor, Mario Draghi.

Even if Lagarde said that the matter should be considered for a third time, the chances of Schnabel succeeding Lagarde in October 2027 look slim.

The Euro is at an interesting juncture in its short to medium-term path. Technically, it must remain above the 1.1700 support to continue to attract support. However, should that support break, it may slip back to test the 1.1620 level. Yesterday, the common currency fell to a low of 1.1712 and closed at 1.1722.

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