15 December 2025: Does the BoE need to bail out the Government?

This week’s final Monetary Policy Committee Meeting of the year is expected to sanction a cut in interest rates of 25 basis points, bringing the base rate to 3.75% after a hiatus lasting since the last cut in June.

It is likely to be another close vote, with only one committee member needing to change their mind for the rate cut to be agreed.

It may well be that the Bank’s Governor, Andrew Bailey, is the “swing voter” on Thursday, with other rate-setters' positions cast in stone. Of the others, the Bank’s Chief Economist, Huw Pill, is known to be against a rate cut, since inflation is currently twice the Bank’s target. The same is true of independent member Catherine Mann, while Megan Greene and Clare Lombardelli have recently spoken out against a cut.

Expectations of a cut followed the Office for National Statistics' revelation on Friday that the UK economy shrank by 0.1 percent in October. The contraction came as businesses hit pause on major investment plans amid fears they would be targeted for a hefty tax raid as Chancellor Rachel Reeves looked to balance public finances in her Autumn Budget.

The data dealt a blow to Rachel Reeves' expansion plans, which appear to have stalled yet again.

In September, the economy contracted by 0.1 percent after manufacturing output was hammered by Jaguar Land Rover, which hit pause on production following its £1.9bn cyberattack.

Market economists believe the continued weakness in the economy will “put further pressure on the MPC to lower interest rates by another 25 basis points.

The services sector, which accounts for around 80% of UK economic output, was the main drag last month, with production falling 0.3% over the month.

Construction activity also weakened, down 0.6%, while manufacturing production provided a rare bright spot, growing 1.1% month-on-month.

Market sources warned against distilling a single month's data, particularly in a month when there has been so much input from the Government. Still, with recent growth figures being tepid at best, it is hard to see where the predicted growth will come from this year and next. It is not sufficient for Rachel Reeves to abrogate responsibility by believing “if the OBR predicts 1.4% growth next year, it will magically happen” without any further Government input.

Friday’s publication of GDP data strengthened the case for monetary easing. However, it depends on whether Bailey wishes to be seen as bailing out the Government when inflation proves sticky.

While a lack of growth is a significant concern, the economy is expected to “bump along the bottom” for at least the first half of next year. There could easily be a recession, but if growth sees two negative quarters, it is expected to fall by no more than 0.2% over each three-month period.

The pound saw significant buying interest last week, rallying to a high of 1.3438. However, it was unable to sustain that level and fell back to close at 1.3366.

Despite having said that the decision has been reached on whom the new Chairman of the Federal Reserve will be, President Trump threw a spanner in the works over the weekend by telling reporters that he sees Kevin Warsh as the frontrunner for the position.

It is unclear what has happened to see Kevin Hassett “fall from grace”, although Trump did say that he expects the new incumbent to consult him over any change to monetary policy. Perhaps Hassett’s recent comments, including praising Jerome Powell for his ability to “herd cats” to oversee rate cuts so far this year, have been seen as a sign of weakness.

Trump, in an interview with The Wall Street Journal, indicated that Warsh, a former Fed governor, has climbed the shortlist of contenders to challenge Hassett, the White House National Economic Council head, whom many had seen as the favourite for the job.

“I think the two Kevins are great,” he said. “I think there are a couple of other people who are also great.”

Trump previously signalled that he had already made up his mind, saying last week he had a “a pretty good idea” of whom to nominate. The President also said last month that he knew who he would pick for the job. The latest comments suggest that the selection process remains in flux.

Trump met Warsh on Wednesday. It’s not clear if he plans to interview other candidates for the job. The President said Warsh told him that borrowing costs should be lower. This is not in doubt, but given the Fed’s dual mandate, price pressures also need to be taken into consideration.

JPMorgan CEO Jamie Dimon signalled support for former Federal Reserve Governor Kevin Warsh as the next chair of the Fed, the Financial Times reported on Friday.

Dimon says Hassett is the candidate likely to cut rates in the short term, according to the report. He made the remarks at the bank's private conference for asset management CEOs in New York on Thursday evening, the Financial Times report added.

Short-termism is a feature of Trump 2.0. A Fed Chair is nominated to serve an eight-year term, but the selection process is only concentrating on the current economic situation.

Chicago Federal Reserve President Austan Goolsbee on Friday explained why he voted against last week’s interest rate cut, telling CNBC that policymakers should have waited until they had more information before easing further.

“I’m pretty optimistic that in 2026 rates will be able to be a fair bit lower than they are today,” the Central Banker said. Still, I’ve just been uncomfortable front-loading too many rate cuts and assuming that what we’ve seen in inflation will be transitory.”

Goolsbee was one of three Federal Open Market Committee members who voted against the quarter-percentage-point reduction, the third consecutive easing measure. Kansas City Fed President Jeffrey Schmid joined him, while Governor Stephen Miran preferred a steeper cut.

The fact that the FOMC had a record of unanimity on monetary policy decisions until the start of this year is not necessarily a good thing, while having the “courage” to stand against the majority provides a more balanced view. The Regional Fed Presidents report on what they are seeing in the twelve districts. It is more than likely they will see a variety of growth patterns.

The dollar reacted poorly to the rate cut, even as Chairman Powell made slightly hawkish comments about the January FOMC meeting. The index fell to a low of 98.14 and closed at 98.40.

The European Central Bank is expected to hold interest rates steady on Dec. 18, marking the fourth consecutive meeting without a cut since the Central Bank lowered rates by 0.25 percentage points on June 11.

Traders believe that since the ECB’s October meeting, the incoming data has done very little to justify any rate change on Dec. 18.

While third-quarter GDP growth was clearly more substantial than the ECB expected, sentiment indicators also point to continued resilience. This points to a significant period of policy inactivity.

Several Economists predict the next shift in European Central Bank interest rates will be up, aligning with the views of investors and influential Executive Board member Isabel Schnabel, as inflation settles around 2%.

Going forward, a lot will depend on the outcome of the war in Ukraine, with the EU, as many predict and U.S. President Trump expects, taking a far more proactive role in either peace negotiations or in defending Ukraine’s sovereignty.

The European Union has “adapted quicker” than expected to the US tariffs shock, according to Schnabel.

She said last week that economic sentiment is at its highest level since April 2023, while company surveys show solid expansion.

Within the EU, trade in services is driving economic growth, even more than consumption of goods, as manufacturing remains “sluggish”. Schnabel said the euro-area economy is on course to grow above potential despite headwinds.

As part of its meeting this week, the ECB will release its estimate of where inflation is expected to be in 2028. This will give the market a preview of the ECB's plans over the next two years. It's the first time the ECB will forecast for 2028. A return to target should strengthen policymakers' argument that an inflation slump expected over the next two years will be temporary.

Part of the reason is the postponement of the EU's new emissions trading system to 2028 from 2027, which also means inflation may be revised further below target in 2027, economists said.

For this year and next, some expect inflation to be revised higher. And Lagarde has already pointed to an upward revision in growth. The forecasts will provide more hawkish signals, which align with Isabel Schnabel’s comments.

The Euro benefited from the slump in the dollar's value following the Fed’s rate cut. It rallied to a high of 1.1762 and closed at 1.1739.

Have a great day!