Europe Asia News

Economists had widely expected a rate cut at a time of weak economic data, a softening labor market, and a recent decline in inflation that exceeded expectations.

However, the vote was narrowly split. BOE Governor Andrew Bailey sided with the more dovish members of the committee rather than the four policymakers who argued that inflation, which stood at 3.2% in November, remains far above the central bank’s 2% target.

In its statement, the MPC emphasized that although inflation remains above target, it is “expected to fall back to target more quickly in the near term,” warning that “the extent of further monetary policy easing will depend on the evolution of the inflation outlook.”

Based on current data, the MPC said that “the BOE’s benchmark interest rate appears likely to continue to decline gradually. However, decisions on additional policy easing will become more challenging.”

According to analysts, for now the rate cut will be welcomed by financially strained consumers as it makes borrowing cheaper, but many will be hurt by lower returns on their savings.

Finance Minister Rachel Reeves welcomed the BOE’s rate cut, saying it would ease cost-of-living pressures, and added:

“Today’s rate cut is the sixth since the [July 2024] election, the fastest pace of rate cuts in 17 years, and good news for families with mortgages and businesses that rely on borrowing. There is still much more to do on the cost of living.”

Economists estimate that if macroeconomic data continue to provide room for maneuver, the central bank could make its next rate cut in early 2026.

JPMorgan’s UK Chief Economist Allan Monks said in an analysis: “After the December meeting, the possibility of further easing is clearly visible. However, the main issue is high wage expectations for 2026. This keeps the BOE cautious, but if this picture softens, the BOE could deviate from the gradual easing path and another cut as early as February could come into play.”

Morgan Stanley’s UK Chief Economist Bruna Skarica and Strategist Fabio Bassani said in a note that they expect another rate cut in February due to easing inflationary pressures and rising unemployment. However, they forecast that when the next rate cut comes, “cautious messages” will be delivered regarding future cuts, adding:

“From then on, taking into account only developments in inflation and wage data and what appears to be persistently high unemployment in our forecasts, we think the BOE could deliver two more rate cuts in the first half of 2026, in April and June.”