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Anticipated Interest Rate Reduction by the Bank of England
This week, the Bank of England is likely to lower its key interest rate by 0.25%, responding to a sluggish UK economy and a softening job market, which reduces the need to maintain high borrowing costs.
Monetary Policy Committee’s Expected Decision
Unless unexpected economic data emerges before Thursday, both investors and analysts predict a close five-to-four vote by the Monetary Policy Committee to decrease the base rate from 4% to 3.75%. This adjustment would mark the lowest borrowing costs since early 2023.
Market Reactions and Predictions
Financial markets have largely anticipated this cut, viewing it as a continuation of the rate-cutting trend that started in 2024. Sanjay Raja, a UK economist at Deutsche Bank, commented, “We foresee a 5-4 vote split, with Governor Bailey casting the deciding vote before Christmas. Since November, GDP growth for Q3-25 has decelerated, and labor demand has weakened.”
Raja also noted, “Governor Bailey is likely to have observed sufficient disinflation evidence, particularly in private sector wages and consumer prices, to justify a rate reduction.”
Future Rate Cuts on the Horizon
Raja anticipates two additional cuts in 2026, in March and June, potentially bringing the base rate down to 3.25%.
Balancing Act for the Bank of England
Andrew Goodwin, chief UK economist at Oxford Economics, suggested the decision might be more nuanced than the 90% probability of a cut suggested by market pricing. “It’s noteworthy that Bailey hasn’t opposed the expectations of a December cut,” Goodwin remarked.
Committee Divisions and Economic Indicators
Thursday’s announcement is expected to underscore divisions within the nine-member committee, with the outcome largely dependent on the governor’s position. In November, Bailey indicated a willingness to ease policy if data continued to show declining inflation.
Recent official data revealed a surprising 0.1% contraction in UK GDP for October, further indicating an economic slowdown.
Upcoming Economic Data Releases
Two significant data releases are expected before the meeting. Economists predict unemployment will rise to 5.1% from 5%, while inflation is projected to decrease to 3.5% in November from 3.6% in October, according to a Reuters survey.
Implications for Borrowers
Laith Khalaf, head of investment analysis at AJ Bell, described a rate cut as “welcome news for borrowers of all kinds.” He added, “The Bank of England is focused on achieving the 2% inflation target, which currently means easing policy.”
