For some time now, Arlingclose has maintained a clear base case that UK Bank Rate will be cut in Q4 2025. We have communicated that expectation persistently, noting that our assessment of inflation, labour market dynamics and fiscal headwinds all point to that timing. Until recently, many banks and market commentators were more cautious, expecting no change this year, but the tide has turned, with Barclays and Goldman Sachs among those now predicting a rate cut on Thursday. This about-turn is worth considering.
Firstly, inflation. Inflation appears to have peaked in September, at a level below expectations of over 4% amid signs that food inflation eased a little. Given that we and the Bank of England see food inflation as a major driver of consumer inflation expectations, that softening in price pressures gives the Bank of England some breathing room. Meanwhile, the labour market is showing signs of softening. While unemployment remains relatively low, the pace of job creation is slowing and hiring intentions among firms are being scaled back. These developments reduce the upside risk of wage-cost spirals, presenting the Bank with a clearer runway to ease policy. Taken together, these developments reduce the risk of second-round effects and therefore makes a cut more plausible.
Against that backdrop, we have the government’s upcoming Autumn Budget. Prospects of higher taxes and lower spending are already weighing on sentiment. The knock-on effect is likely to be weaker demand and lower inflation over the medium term, and let’s face it, economic growth has hardly been stellar despite a stronger, tariff-influenced boost in Q1. In short, a fiscal drag is building, which supports an easing of monetary policy.
Despite all this, a cut this week remains finely balanced. The Bank of England will want to ensure that second-round effects from the recent rise in inflation are contained and that inflation declines to target. A further cut when the CPI rate is around 3.8% could send the wrong signal. The MPC members’ are decidedly split on the outlook for UK growth and inflation, with even bank staff on the Committee not pulling in the same direction – Hugh Pill, Bank of England Chief Economist, has been forthright in his views that inflation and inflation expectations should be tackled aggressively and is somewhat less likely to support monetary easing.
Policymakers may choose to wait until more information on the country’s fiscal position is available. With the government delaying the Budget until the end of November, this suggests that December may be the more likely meeting for a further rate cut. The press conference after this week’s meeting may be used to foreshadow the Committee’s actions given possible changes to the government’s fiscal stance.
The SONIA forward curve suggests that the market is also sitting on the fence. Current pricing suggests around 30% chance of a rate cut this week. While a relatively large increase from near zero a few weeks ago, it is a relatively low chance. More interestingly, the cumulative chance for a December rate cut is nearer to 70%, a development weighing on near term interest rates. Furthermore, the market is now pricing in a significantly lower terminal rate closer to 3.25% during 2026. We have been highlighting the downside risks to the path for Bank Rate for some time given our views on disinflation, weak growth and the need for fiscal responsibility, so this development is not unexpected.
Ultimately, while a cut this week still seems improbable, the direction of travel is clear and points to the prospect of lower interest rates for the UK during 2026. This has implications for medium-term rates and clients’ income/debt costs and hedging strategies, as lower expectations are priced in. However, given the uncertainty around the Budget at the end of the month and the ability of politicians to try and please everyone and end up pleasing no-one, a range of outcomes and continued volatility in expectations will remain.
Related Insights
What to Expect in the Autumn Budget?