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The Bank of England is widely expected to cut interest rates on Thursday as signs mount that UK inflation is easing and economic growth is weakening. Financial markets anticipate a 25-basis-point reduction, bringing the benchmark Bank Rate down to 3.75% from 4%. If confirmed, this would mark the fourth rate cut of 2025 and take borrowing costs to their lowest level in nearly three years, offering some relief to households and businesses.
A rate cut would also provide political breathing room for Chancellor Rachel Reeves and Prime Minister Keir Starmer, who face growing pressure to revive economic growth. However, despite the expected move, investors and economists believe the scope for further easing in 2026 remains limited due to persistent inflation pressures in the UK economy.
Recent data showed consumer price inflation falling sharply to 3.2%, a bigger-than-expected slowdown that followed signs of a cooling labour market and the highest unemployment rate since 2021. Britain’s economy also contracted by 0.1% in the three months to October, reflecting weak business confidence ahead of Reeves’ November budget. These developments have strengthened the case for a near-term interest rate cut.
Even so, UK inflation remains the highest among G7 economies, partly due to higher employer taxes introduced last year. Services inflation continues to prove stubborn, and business surveys suggest underlying price pressures have not fully dissipated. Measures in the government’s budget, such as removing green levies from energy bills and freezing rail fares, are expected to have only a temporary impact on inflation.
The Bank of England’s Monetary Policy Committee remains deeply divided, with recent votes narrowly split. Analysts expect a close decision again, potentially hinging on Governor Andrew Bailey’s vote. While markets are pricing in one additional rate cut in 2026, policymakers are likely to stress a cautious, gradual approach rather than signal a full easing cycle.
With inflation still above target and global central banks nearing the end of their own rate-cutting phases, the BoE is expected to balance near-term economic weakness against longer-term price stability risks.
