A cut at last — but the Bank is signalling patience, not a pivot
The Bank of England’s latest base rate cut has landed as both a relief and a reality check for the markets; a welcome easing, but one that warns of a slow, conditional journey back towards neutral.
Earlier today, the Monetary Policy Committee (MPC) voted 5–4 to cut Bank Rate by 0.25 percentage points to 3.75%, its lowest level in almost three years, following a sharper‑than‑expected fall in inflation and signs of weaker growth and a loosening labour market. The move eases pressure on many mortgage borrowers and reinforces recent reductions in wholesale funding costs and swap rates.
But from economists to the gilts market, the reaction has been notably restrained. This is not the start of an aggressive easing cycle.
Economists: a cautious cut
James Bennett, CFA, UK Lead at BMI (a Fitch Solutions company), characterises the move as a “hawkish cut” – a reduction in rates that comes with little sign of a dovish shift in mindset at the Bank.
Recent disinflation gave the MPC room to move. CPI inflation fell to 3.2% in November from 3.6% in October, reflecting downward movements in food, drink, alcohol, and tobacco prices. The Bank also flagged that measures in the Autumn Budget are expected to directly shave around half a percentage point off inflation, further supporting the case for a modest cut.
But Bennett stressed that underlying price pressures are still too strong for the Bank’s comfort. Survey data show wage growth and 12‑month inflation expectations remain elevated, and labour market indicators, while loosening, are showing little stress – hardly the backdrop for a rapid pivot to easy money.
Michael Saunders, Senior Economic Advisor at Oxford Economics and a former MPC member, describes the move in similar terms. “This is a cautious cut,” he said. “The decision to cut rates is balanced by language that aims to signal that further easing is likely to be gradual and is not guaranteed.”
For Saunders, the knife‑edge nature of the vote captures the central dilemma facing policymakers. “The closeness of the decision to cut rates (5–4) reflects the difficult balance facing the MPC. On one side, sluggish growth and rising unemployment argue for lower interest rates. But, at the same time, the Agents and DMP surveys suggest that 2026 pay deals are likely to be a bit higher than expected a few months ago and a little above levels consistent with a sustained return of inflation to target.”
That tension helps explain why four MPC members voted to hold rates unchanged, and why Governor Andrew Bailey — who cast the deciding vote in favour of the cut — was careful to stress that further moves are far from assured.
“In total, the MPC remains focused on recalibrating policy as it approaches neutral,” Bennett said. “The direction of travel for Bank Rate is lower, but only in a very gradual manner.”
Saunders makes a similar point. “The MPC’s language emphasises that further easing is likely but not definite, given that Bank Rate is approaching estimates of neutral, that neutral itself is uncertain, and that it would be preferable to avoid cutting too far and then having to reverse course.”
Budget effects: helpful but not decisive
While the Bank acknowledged that Autumn Budget measures will directly lower inflation and support growth in 2026, both Bennett and Saunders emphasise that these effects are not central to the rate‑cut decision.
“The Budget does not seem to have played a big role in the decision to cut rates,” said Saunders. “It will directly lower inflation and lift growth in 2026, but both these effects are likely to be temporary and unwind in 2027. The MPC’s interest rate decisions are focussed much more on economic prospects a year or two ahead rather than temporary one‑offs.”
Bennett similarly notes that the Budget’s estimated half‑percentage‑point impact on inflation is a “significant help” at the margin, but does not override the Bank’s core concerns about wage dynamics and longer‑term inflation expectations.
Gilts: markets price out future cuts
In gilts, the verdict on the Bank’s hawkish tone was swift.
“In line with our ‘hawkish cut’ view, ten‑year gilt yields jumped 7bps on the decision, which came as markets priced out 7bps of rate cuts in 2026 (per SONIA futures),” Bennett said.
Rather than celebrating the start of a deep cutting cycle, investors effectively reduced the amount of easing they expect further out, even as the first cut finally arrived. The message: policy is heading lower, but by less – and more slowly – than some had hoped.
Looking ahead, Bennett expects monetary policy to play a diminishing role in driving longer‑dated gilt yields. “We expect monetary policy to play a smaller part in driving long‑end gilt price action over the coming year as short‑end rate volatility falls,” he said. “Instead, long‑end gilts will likely be pushed around by international factors, with higher issuance expected in Germany, Japan, and the US in particular potentially driving the yield curve slope higher.”
That matters for mortgage pricing. Even with a lower Bank Rate, upward pressure on long-dated gilt yields driven by global supply dynamics could limit how aggressively lenders are able to cut longer-term fixed rates.
The rate path: economists see slow, limited easing
Bennett’s base case is for two further cuts in 2026, likely one in mid-year and another in the second half, after clearer evidence of wage moderation and “material disinflation” emerges. Beyond that, BMI expects only one additional cut in 2027, warning that further easing risks policy becoming accommodative.
Saunders’ profile is similar, though slightly more front-loaded. Oxford Economics expects Bank Rate to fall to 3.25% by the end of next year, with the next cut likely in April and another in the second half.
Both outlooks underline a consistent message: the peak in rates is behind us, but the path down will be slow, cautious and firmly data-dependent. The “new normal” is likely to involve modestly positive real rates, well above the emergency settings of the past decade.
