The Bank of England (BoE) is poised to deliver a critical reprieve to borrowers this Thursday. Markets have widely priced in a reduction of the benchmark BoE interest rate from 4% to 3.75%.
This adjustment would represent the fourth rate reduction of 2025. Consequently, borrowing costs in the UK would fall to their lowest point in nearly three years.
However, celebration may be premature. Financial experts caution that stubborn price pressures will likely prevent a sustained easing cycle heading into 2026.
Economic Stagnation Forces Hand
Policymakers are reacting to a grim economic reality. Recent data reveals the British economy contracted by 0.1% in the three months leading up to October. Businesses largely froze investment in anticipation of the November budget.
Simultaneously, unemployment has spiked to levels not seen since 2021.
This cut offers a potential win for Prime Minister Keir Starmer and Finance Minister Rachel Reeves. Both leaders face mounting pressure to fulfill promises of economic revitalization.
BoE Interest Rate Decisions Facing Resistance
Despite the cooling economy, the UK’s inflation landscape remains treacherous. Data released Wednesday showed inflation dipping to 3.2%. While significant, this figure remains the highest among G7 nations.
Recent tax hikes on employers, implemented by Reeves, are partly fueling these lingering costs. Furthermore, the UK’s rate remains nearly double that of the European Central Bank (ECB).
The decision rests with the Monetary Policy Committee (MPC), which remains deeply fractured. Analysts predict a razor-thin 5-4 vote in favor of a cut, expecting Governor Andrew Bailey to tip the scales.
Hetal Mehta, chief economist at St. James’s Place, noted that while the data supports a cut, the path forward is unclear.
“There’s enough ambiguity around some of the numbers going into next year for there not to be back-to-back rate cuts,” Mehta noted. “It’s the magnitude (of rate cuts) that is up for debate.”
Sticky Inflation Limits Future Cuts
Looking ahead, the road to cheaper money appears blocked. Investors currently price in only a single additional rate cut for 2026, likely occurring in late April.
Underlying data supports this caution. S&P Global’s Purchasing Managers’ Index suggests businesses are beginning to pass costs on to consumers again. Additionally, price increases in the vital services sector have barely slowed.
Temporary budget measures, such as frozen rail fares and the removal of green levies, are also masking the true cost of living.
Daniela Hathorn, senior market analyst at Capital.com, believes the Bank will tread carefully regarding the BoE interest rate trajectory.
“Because inflation remains above target and services components still look sticky, policymakers are unlikely to deliver a deeply dovish message,” Hathorn said. “Instead, the BoE is likely to frame any cut as part of a gradual, risk-managed shift rather than a full easing cycle.”
Globally, this cautious stance aligns with other major central banks. The U.S. Federal Reserve has signaled only one more cut for 2026, while the ECB seems to have finished its current loosening phase.
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