The Bank of England plans to lower its benchmark interest rate to 3.75% from 4%, marking its fourth reduction in 2025 amidst a notable slowdown in inflation and economic weakness. This quarter-point cut would bring the rate to its lowest level in nearly three years, although still above the European Central Bank’s rate.
Inflation in the UK has been declining, with the Consumer Prices Index (CPI) falling to 3.2% in November, down from 3.6% in October. This drop is primarily attributed to lower food prices, particularly in items like cakes, biscuits, and cereals, along with reduced impacts from tobacco prices and Black Friday sales. The November CPI fell below market expectations and the Bank’s own projection of 3.4%, prompting financial markets to fully anticipate the interest rate cut.
Despite the easing in inflation, the UK maintains the highest rate among G7 countries, partly due to recent tax increases on employers. The Monetary Policy Committee (MPC) remains split on the decision, reflecting differing views on the need for further rate cuts.
A narrow 5-4 vote in favor of a cut is expected in December. Persistent inflation, particularly in the services sector, and the temporary impacts of fiscal policies suggest that the Bank may not signal wider easing measures. Instead, officials are likely to frame the cut as a cautious response to current economic risks.
Recent economic data highlights a weaker labor market and economic contraction, with the UK economy shrinking in the three months leading to October and unemployment rising to its highest level since early 2021.
These factors bolster the case for easing monetary policy. While markets are preparing for a rate cut, the Bank is expected to proceed carefully, maintaining a focus on the broader economic outlook and inflation management.
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