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The move would mark the first rate cut since August, pushing borrowing costs to their lowest level in three years

BY Pedro Goncalves, Finance Reporter, Yahoo Finance UK

The Bank of England is expected to cut its benchmark interest rate by a quarter of a point on Thursday as signs of a weakening labour market and a larger-than-forecast inflation drop ease pressure on policymakers to keep borrowing costs high.

Traders' bets imply a 98% chance the Monetary Policy Committee will lower the base rate to 3.75% from 4%. That would take borrowing costs to their lowest level since early 2023.

UK inflation fell by more than economists had expected in November to 3.2%, down from 3.6% in October, strengthening expectations that the central will cut interest rates.

ICAEW economics director Suren Thiru said: “These figures, alongside the recent deluge of downbeat data, mean that an interest rate cut tomorrow looks certain.”

Adam Deasy, an economist at PwC, said: “It’s a significantly larger fall than expected, suggesting the UK may have turned a corner into sustained disinflation.

“After keeping rates on hold in November, a few factors point to the Bank being able to cut on Thursday. The autumn budget included several measures that will mechanically reduce inflation going forward, such as rail fare and prescription charge freezes.

“Together with today’s significantly softer CPI print and an uptick in the unemployment rate on Tuesday, the pain point for the UK economy may now be weakening demand rather than higher prices. At risk of counting our turkeys before they have hatched, 2026 could mark the long-awaited return to low and stable inflation.”

Official figures published on Friday showed UK GDP contracted unexpectedly by 0.1% in October, reinforcing evidence of a cooling economy.

Unemployment rose and wage growth slowed, according to the Office for National Statistics (ONS), in further signs of weakness in the jobs market.

The rate of UK unemployment rose to 5.1% between August and October, its highest level in nearly five years, which was in line with consensus expectations, but higher than the 5% seen in the previous three months.

Financial markets have largely priced in a reduction in borrowing costs, seeing the move as another step towards the end of a rate-cutting cycle that began in 2024.

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Sanjay Raja, UK economist at Deutsche Bank, said: "We expect a 5-4 vote split, with governor Bailey having the deciding vote ahead of Christmas. What’s changed since the November [meeting]? Q3-25 GDP growth has slowed, with labour demand also turning weaker.

"And most importantly, we think governor Bailey will have seen enough evidence of further disinflation — in both private sector pay momentum and prices (CPI, including services CPI) — to opt for a rate cut."

Raja expects two further reductions in 2026, in March and June, which would take the base rate down to 3.25%.

Andrew Goodwin, chief UK economist at Oxford Economics, said the decision was likely to be more finely balanced than the roughly 90% probability of a cut implied by market pricing.

"But it's notable that Bailey has chosen not to push back against expectations of a December cut," Goodwin said.

Thursday’s announcement is expected to highlight once again divisions among the nine-member committee, with the outcome hinging on the governor's stance. When the MPC last met in November, Bailey indicated he was prepared to loosen policy if incoming data continued to point toward falling inflation.

Laith Khalaf, head of investment analysis at AJ Bell, said a rate cut would be “festive 

He added: “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.”

Philip Shaw, an economist at Investec, said tax measures announced by chancellor Rachel Reeves “do not begin to bite until 2028-29 and therefore are of relatively little significance in the current interest rate debate.

“That said, we would note that the overall fiscal stance is relevant thanks to previous budget measures weighing on the economy, notably the continued freeze in income tax thresholds."

Enrique Diaz-Alvarez, chief economist at Ebury, said the coming days would be crucial for sterling.

“This week is shaping up to be a critical one for the pound,” he said.

“The vote on rates this week is likely to be another close one, highlighting the growing disparity of views among committee members. We also expect Bailey and co. to reiterate 

Sarah Coles, head of personal finance at Hargreaves Lansdown and a Yahoo Finance UK columnist, said savers were also likely to feel the impact of looser policy.

"Savings rates will tend to follow the Bank of England, all things being equal, and it seems likely they will trend downwards in 2026," she said.

"However, there’s a huge amount of competition in the savings market, as providers push for market share. Rates have stayed relatively steady and robust, despite an expected rate cut in December, and you can still make more than 4%."

She added that online banks and savings platforms continued to offer competitive deals. At the same time, cash ISA rates remained resilient amid strong demand ahead of a planned cut to the allowance in 2027.

In the US, the Federal Reserve cut interest rates last week to their lowest level since 2022. However, chair Jerome Powell said policymakers would continue to carefully assess economic data in the months ahead.