The Bank of England has delivered an early Christmas gift to borrowers, slashing interest rates in a decisive move to support the faltering UK economy. At noon on Wednesday, the Monetary Policy Committee voted to cut the base rate from 4% to 3.75%, marking the first reduction in over a year and taking borrowing costs to their lowest point since January 2023.
Inflation Fall Paves Way for Monetary Easing
The widely anticipated decision follows Wednesday's sharp drop in the inflation rate to 3.2%. This significant easing in the cost of living squeeze provided crucial reassurance to policymakers that the Consumer Prices Index is steadily marching back towards the Bank's 2% target. The slowdown in food price rises was a particularly encouraging signal.
Money markets had priced in a near-certain cut, with analysts assigning a 97.5% probability to a quarter-point reduction. Only a 2.5% chance was given to rates being held at 4%, reflecting overwhelming market confidence in the Bank's dovish pivot.
Labour Market Weakness Adds to Pressure for Action
Further impetus for the cut came from concerning labour market data released on Tuesday. Unemployment climbed to a fresh five-year high, while wage growth showed signs of slowing. This double-edged report highlighted the growing strain on the economy, suggesting a need for more supportive monetary policy to stimulate activity.
With the economy confirmed to have shrunk in October, investors were confident that at least five of the nine MPC members would vote for a cut. Sanjay Raja, chief UK economist at Deutsche Bank, commented ahead of the decision: "With disinflation progress on track, the labour market showing added signs of loosening, and GDP growth missing expectations, a Christmas rate cut looks all but certain."
Looking Ahead to Further Cuts in 2026
Raja also indicated that more rate cuts will likely follow in 2026, though the pace will depend on forward-looking indicators. He noted that lingering weakness in the labour market could elicit a more dovish stance from the Bank next year. The evolution of firms' price expectations and wage settlements will be key metrics watched closely by Threadneedle Street.
In a busy day for central banking, other major institutions took a more cautious stance. The central banks of Norway and Sweden, along with the European Central Bank for the eurozone, all announced decisions to leave their interest rates on hold. Their respective announcements were scheduled throughout the morning and early afternoon.
The day's financial agenda was packed, culminating in the US inflation report for November at 1.30pm GMT, which will provide further clues on the global economic trajectory.
