Bank of England signals December rate cut as inflation eases and growth stalls

The Bank of England’s Monetary Policy Committee has left interest rates unchanged at 4 per cent for a second consecutive meeting, with a narrow five to four vote reflecting the finely balanced economic outlook. This decision comes as policymakers observe a clear signal that inflation in the UK has peaked, giving rise to speculation about a potential rate cut in December.

Bank Governor Andrew Bailey, who cast the deciding vote, emphasised a cautious approach, citing the need for confirmation that inflationary pressures have subsided before considering further reductions. Inflation currently stands at 3.8 per cent, still notably above the Bank’s 2 per cent target, yet indications are that it has started its descent. Updated forecasts now predict that inflation will fall back to approximately 2.5 per cent next year, finally settling near target by 2027.

Since Labour assumed government in July 2024, interest rates have been reduced five times, taking pressure off both households and businesses. The most recent cut was made in August. Despite these measures, the UK economy continues to show signs of fragility. Unemployment is expected to rise above 5 per cent in early 2026, up from the current 4.8 per cent, amid subdued hiring and weak growth.

With Chancellor Rachel Reeves preparing for her pivotal budget late this month, attention has turned to potential fiscal tightening. Reeves is expected to raise taxes in the forthcoming statement, with the dual aims of addressing the national debt and easing the cost of living. The Bank has noted that anticipation over budget decisions may have stalled business activity, as households rein in their spending.

Market expectations have rapidly shifted following the latest MPC decision, with a near-60 per cent probability now priced in for a quarter-point rate cut in December. Some City economists argue that additional tax increases could further dampen demand, adding to the downward pressure on inflation and strengthening the case for monetary easing.

Chief Economist Huw Pill has raised the risk of ‘intrinsic inflation persistence’, pointing to elevated pay settlements and price rises in response to lingering inflation. However, Bailey signalled growing confidence that the risk of sustained high inflation is fading, leaving the Committee ready to act should disinflation become firmly established.

Growth prospects remain tepid, with the Bank projecting GDP to rise just 0.2 per cent in the third quarter and to slow from 1.5 per cent this year to 1.2 per cent next. An improvement is expected in subsequent years, with GDP growth forecasts of 1.6 per cent in 2027 and 1.8 per cent in 2028. Persistent inflationary pressures, global factors, and domestic uncertainties continue to pose challenges, but a shift in monetary policy could soon provide fresh relief to the UK’s beleaguered economy.