At next week’s meeting, the Bank of England’s MPC is largely expected to deliver a Christmas interest rate cut in an attempt to boost the economy.
Such a cut would, of course, be welcomed by businesses, households and the government but if it does materialise, it might well be a matter of enjoying it while it lasts, as Laith Khalaf, head of investment analysis at AJ Bell, explains in his latest analysis:
“Expectations are running high that the Bank of England will deliver a Christmas rate cut, but the outlook for 2026 could put the champagne on ice.
“A cut would take base rate to its lowest level in almost three years. The last time base rate began with a ‘3’ was on 2 February 2023, just before the Bank hiked rates to 4% in the face of a brutal inflationary storm.
“Markets are currently pricing in over a 90% chance that we’ll get a rate cut in December*. In other words, it will be a huge shock to the system if we don’t. That seems unlikely seeing as at the last MPC meeting, four members of the committee already wanted to cut rates and were narrowly thwarted.
“A rate cut would be festive news for borrowers of all stripes: businesses, households and His Majesty’s Government. But a look at the longer term picture may dampen festive spirits. The market is now expecting just one interest rate cut in the UK next year, which would be a step-change from the metronomic quarterly cuts we have seen in 2025. Of course, market expectations can be pretty sensitive to prevailing sentiment, and much can change in the economic data which would move the dial in either direction. But this isn’t an isolated case of the end of the rate cutting cycle hoving into view.
“In Europe the expectation is for rates to flatline throughout 2026, and there has even been some talk of the next move being a hike, ignited by hawkish comments from ECB board member Isabel Schnabel. Meanwhile in Japan, Canada and Australia, the market is predicting the next interest rate move will be upwards. This signals the beginning of a shift in the tectonic plates of global monetary policy. Though the big continental beast of the US is still expected to gently and gradually shift rates down.
“However, despite Donald Trump’s best efforts, some US policymakers are taking a hawkish position. The consensus from the Fed is that one more rate cut will be forthcoming in 2026, but seven of the nineteen Fed committee participants think interest rates should be at the current level, or higher, by the end of 2026, according to the latest dot plot released by the central bank. This will not please the US president as he stands ready to name a new Fed chair, and suggests that even a Trump acolyte in the role may struggle to push through a significantly looser path for monetary policy.
“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.”
*Source for market rate expectations is LSEG Refinitiv as at 11 December 2025.
