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The Bank of England is expected to cut its benchmark interest rate by a quarter of a point this week as signs of a weakening labour market and a stagnant UK economy ease pressure on policymakers to keep borrowing costs high.
Barring an unexpected shift in economic data ahead of Thursday’s decision, investors and economists anticipate a narrow five to four vote by the Monetary Policy Committee to lower the base rate to 3.75% from 4%. That would take borrowing costs to their lowest level since early 2023.
Financial markets have largely priced in a reduction, seeing the move as another step towards the end of a rate-cutting cycle that began in 2024.
Sanjay Raja, UK economist at Deutsche Bank, said: “We expect a 5-4 vote split, with governor Bailey having the deciding vote ahead of Christmas. What’s changed since the November [meeting]? Q3-25 GDP growth has slowed, with labour demand also turning weaker.
“And most importantly, we think governor Bailey will have seen enough evidence of further disinflation — in both private sector pay momentum and prices (CPI, including services CPI) — to opt for a rate cut.”
Raja expects two further reductions in 2026, in March and June, which would take the base rate down to 3.25%.
Andrew Goodwin, chief UK economist at Oxford Economics, said the decision was likely to be more finely balanced than the roughly 90% probability of a cut implied by market pricing.
“But it’s notable that Bailey has chosen not to push back against expectations of a December cut,” Goodwin said.
Read more: BoE policymakers split on interest rate outlook as inflation risks diverge
Thursday’s announcement is expected to highlight once again divisions among the nine-member committee, with the outcome hinging on the governor’s stance. When the MPC last met in November, Bailey indicated he was prepared to loosen policy if incoming data continued to point toward falling inflation.
Official figures published on Friday showed UK GDP contracted unexpectedly by 0.1% in October, reinforcing evidence of a cooling economy.
Two key data releases will precede the meeting. Economists expect unemployment to rise to 5.1% on Tuesday from 5% previously, while inflation is forecast to ease to 3.5% in November from 3.6% in October, according to a Reuters poll.
Laith Khalaf, head of investment analysis at AJ Bell, said a rate cut would be “festive news for borrowers of all stripes”.
He added: “The Bank of England will be focused on hitting the 2% inflation target here in the UK, and for the time being that means loosening policy.
“But we shouldn’t expect a cascade of rate cuts next year.
“Previous monetary easing will still be working through the system and greasing the wheels, but fresh stimulus could be in short supply throughout 2026.”
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Philip Shaw, an economist at Investec, said tax measures announced by chancellor Rachel Reeves “do not begin to bite until 2028-29 and therefore are of relatively little significance in the current interest rate debate.
“That said, we would note that the overall fiscal stance is relevant thanks to previous budget measures weighing on the economy, notably the continued freeze in income tax thresholds.”
Enrique Diaz-Alvarez, chief economist at Ebury, said the coming days would be crucial for sterling.
“This week is shaping up to be a critical one for the pound. The Bank of England meeting on Thursday will be preceded by the October labour market report on Tuesday, the December flash PMIs of business activity (also on Tuesday) and the November inflation report on Wednesday,” he said.
“Expectations are for the same stagflationary combination that is making monetary policy unusually difficult, namely a labour market that continues to shed jobs and stubbornly high inflation significantly above the central bank’s target.
“We still expect another reduction to the base rate to 3.75% on Thursday, but it isn’t clear when or even whether the Bank of England can continue its rate-cutting cycle unless inflation starts trending decisively down.
“The vote on rates this week is likely to be another close one, highlighting the growing disparity of views among committee members. We also expect Bailey and co. to reiterate that any future cuts will be ‘gradual and careful’ and certainly not set in stone.”
Sarah Coles, head of personal finance at Hargreaves Lansdown and a Yahoo Finance UK columnist, said savers were also likely to feel the impact of looser policy.
“Savings rates will tend to follow the Bank of England, all things being equal, and it seems likely they will trend downwards in 2026,” she said.
Read more: NatWest, Halifax and Nationwide cut mortgage costs ahead of interest rate decision
“However, there’s a huge amount of competition in the savings market, as providers push for market share. Rates have stayed relatively steady and robust, despite an expected rate cut in December, and you can still make more than 4%.”
She added that online banks and savings platforms continued to offer competitive deals. At the same time, cash ISA rates remained resilient amid strong demand ahead of a planned cut to the allowance in 2027.
With inflation still close to double the BoE’s 2% target, the UK central bank has moved more cautiously than the European Central Bank, whose benchmark rate now stands at 2%.
In the US, the Federal Reserve cut interest rates this week to their lowest level since 2022. However, chair Jerome Powell said policymakers would continue to carefully assess economic data in the months ahead.
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