The Bank of England is widely expected to vote to cut the base rate by 0.25% to 3.75% when its Monetary Policy Committee meets on Thursday.
Expectations have shifted over the past fortnight following a run of weaker UK economic data, including a contraction in GDP and signs of a softening labour market, and traders are now pricing in not just one cut but also another early in 2026.
GDP Contracting
UK gross domestic product fell by 0.1% in October, according to the Office for National Statistics, and also declined on a three-month basis. It marked the first rolling quarterly contraction since late 2023 and followed earlier monthly declines, reinforcing concerns that the economy has lost momentum as it heads into winter.
Morgan Stanley is predicting back-to-back rate cuts as policymakers respond to an economy it says “needs some support”. The investment bank expects borrowing costs to be lowered in December and again early next year, arguing that monetary policy remains restrictive relative to current conditions.
Weaker backdrop
Its chief UK economist, Bruna Skarica, said the Bank of England is now dealing with a materially weaker backdrop than it was when it last paused the pace of easing. She pointed to a sharp fall in construction output and slowing activity across interest-rate-sensitive sectors as evidence that higher rates are still feeding through.
“The UK economy the Bank of England saw in August does not seem to be the economy in place today,” she wrote, adding that declining activity suggested policy was still weighing heavily on demand.
Labour market pressure builds
The labour market has also added to the case for a cut. Unemployment has risen to 5.1%, its highest level in almost four years, while vacancies have continued to fall and wage growth has moderated. The combination has reduced immediate inflationary pressure in the jobs market, one of the Bank’s key areas of focus.
Inflation easing
Inflation itself remains above target, although the recent direction of travel has been downward. Headline CPI eased to 3.6% in October, with economists expecting further gradual declines in 2026 as upward pressure from energy and goods prices continues to fade. Services inflation remains more persistent, but has shown early signs of cooling.
A Reuters poll of economists published this week found a clear majority expecting a December cut, followed by at least one further reduction in the first quarter of next year. Money markets are also pricing in a similar path, with expectations that the base rate could fall to 3.5% by spring if incoming data continues to weaken.
Markets brace for a close vote
Despite this, the Bank’s decision is not expected to be unanimous. The Monetary Policy Committee has been divided throughout 2025, and analysts expect another tight vote, reflecting ongoing concern among some members about declaring victory over inflation too soon.
The Bank has repeatedly stressed that any easing will be gradual and data-dependent, and Thursday’s statement is likely to underline that message. Even with a cut, policymakers are expected to signal caution on the pace of further reductions, particularly if service inflation or wage growth re-accelerates.
