Traders are increasingly anticipating that the Bank of England (BoE) may lower interest rates in December, following new market signals suggesting a possible 0.25% cut. While most investors expect rates to remain at 4% after the Monetary Policy Committee’s (MPC) November meeting, many now believe that the final meeting of 2025—set for 18 December—could bring the first reduction, taking rates to around 3.75%.
The growing speculation comes amid fresh economic data showing that inflation has remained steady, prompting analysts to think the BoE might start shifting its stance towards easing monetary policy. September’s consumer price index (CPI) held firm at 3.8%, below both the BoE’s and economists’ forecasts of 4%. This was the third consecutive month inflation stayed at this level, signalling some stability after months of volatility.
Sanjay Raja, chief UK economist at Deutsche Bank, noted that the odds of a rate cut before the end of 2025 have increased. He said that with Chancellor Reeves preparing policies to ease the cost of living in the upcoming budget, a December rate cut “is very much in play.”
The moderation in inflation, especially in food prices, has been a key factor driving these expectations. Suren Thiru, economics director at the Institute of Chartered Accountants, commented that the softer-than-expected inflation figure indicates the peak may have passed. However, he also warned that the BoE might prefer to wait until after the budget before making any major policy changes to ensure clarity on how new measures could affect inflation.
Official data from the Office for National Statistics (ONS) revealed that annual inflation for food and non-alcoholic beverages eased to 4.5% in September, down from 5.1% in August. This marks the first slowdown in food inflation since March, offering some relief to households and policymakers alike.
Rob Wood, chief UK economist at Pantheon Macroeconomics, said the broad slowdown across inflation categories was a positive sign. He noted that inflation in September was 20 basis points lower than both market and MPC expectations, strengthening the case for a December rate cut.
Despite the encouraging data, inflation still remains nearly double the BoE’s 2% target. Nevertheless, Wood added that the figures are likely to bolster support among the more dovish MPC members pushing for a modest reduction in rates.
Not everyone shares the same optimism. Monica George Michail, associate economist at the National Institute of Economic and Social Research (NIESR), suggested that inflation will likely remain above 3% through early 2026 before gradually easing. She believes the BoE will wait until February 2026 before making any moves, to avoid reigniting inflationary pressures.
Matthew Ryan, head of market strategy at Ebury, echoed this cautious view. He said that while the cooling job market signals the need for rate relief, the persistent inflation means the MPC must tread carefully. According to Ryan, the BoE will want stronger evidence that inflation has truly peaked before taking action.
Market forecasts are also being revised in light of the new data. Consultancy Capital Economics has brought forward its expected rate cut from March to February, while Martin Beck from WPI Strategy suggested that markets may be underestimating how quickly the Bank could move. Beck added that falling inflation, helped by easing energy and food costs, could prompt earlier intervention.
The upcoming autumn budget is likely to play a critical role in shaping the BoE’s decision-making. Analysts from ING noted that the Bank will be closely watching for signs of fiscal tightening, such as tax increases, before committing to any rate cuts. They emphasised that the BoE will want assurance that future tax measures won’t inadvertently push inflation back up.
ING also pointed out that the decline in food prices could make it easier for the Bank to justify lowering rates. Food inflation has been a major concern for policymakers this year, but September’s figures provided a welcome change, with prices dropping and the annual rate falling below 5%.
The analysts noted that food inflation is now half a percentage point below the BoE’s August projections, which could alleviate one of the main pressures on the Bank’s inflation outlook. This trend, they said, might clear one of the final hurdles preventing a move towards easing policy.
Traders are now adjusting their expectations accordingly. Interest rate futures indicate that markets are pricing in a 64-basis-point reduction in rates by the end of 2026, compared to 57 basis points before the inflation report was published.
Overall, while opinions vary, sentiment has clearly shifted toward the likelihood of a rate cut in December—or at least early next year. If inflation continues to cool and the economy shows resilience, the BoE may soon find the room it needs to start easing monetary policy after an extended period of restraint.
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