The Bank of England’s decision to reduce interest rates by 0.25 percentage points at this year’s final meeting of the Monetary Policy Committee marks a meaningful change in direction.
After an extended period focused on restraining inflation, policymakers are now signalling that the balance of risks has begun to shift. Inflation falling more than expected to 3.2% in November only further reinforces this shift.
The priority is no longer solely about cooling prices, but about supporting an economy that has absorbed higher interest rates for long enough. Last week’s disappointing announcement of a 0.1% fall in GDP for October and the easing in inflationary pressures have reinforced the need for monetary policy relaxation – just in time for Christmas!
This cut provides modest but important relief for a government desperately seeking to grow the economy and support the cost-of-living. Lower interest costs should ease financial strain on households and firms, particularly those most exposed to higher debt servicing.
While this move will not transform economic momentum overnight, it reduces the likelihood of prolonged weakness and sets the stage for a much-needed improvement in activity through 2026. Business confidence, which has been dampened by elevated borrowing costs, may begin to recover as financing conditions slowly improve.
Sterling instantly weakened following the announcement of October’s promising inflation data, and this interest rate cut is likely to weaken it further. This is a positive development for UK trade, making UK exports more competitive in international markets.
Inflation risks have not completely vanished. Services inflation remains elevated and external shocks — from energy markets to global trade tensions — could yet disrupt progress. However, with pressures cooling another cut in Spring is more likely than not.
As the UK enters 2026, the policy message is clear. Monetary conditions are beginning to normalise, and inflation is becoming more manageable. The Bank of England is not signalling a rapid easing cycle, but it is laying the groundwork for a sustainable low interest rate economy in 2026.
