Recent data, such as wage growth and consumer price index (CPI), supports the view of a December interest rate cut by the Bank of England (BoE). The risk of a rate cut in November is increasing, but the Monetary Policy Committee (MPC) might wait for the upcoming budget, with delays to February dependent on new data. Factors like fiscal tightening and labour market conditions suggest BoE cuts could continue into 2026.
Private sector wage growth was below expectations in August, while CPI inflation indicators were lower than anticipated in September. Upcoming budget announcements and potential tax policy changes may offer a deflationary impulse. Inflation is nearly double the BoE’s 2.0% target, and MPC members have made cautious statements. However, signs of labour market slack and moderated wage growth could support further BoE easing. This could lead to a gradual decline in services inflation, potentially resulting in three more BoE rate cuts by 2026.
Fxstreet Insights Team
The FXStreet Insights Team consists of journalists who compile observations from market experts, providing insights through a combination of commercial notes and analyses from both internal and external sources.
Recent data suggests we are getting closer to a Bank of England rate cut, likely in December. Key indicators like the September CPI, which came in at 3.8%, and cooling private-sector wage growth support this view. Economic momentum is also slowing, with recent PMI data from September hovering just below the 50 mark that separates growth from contraction.
While an earlier cut in November is possible, the Monetary Policy Committee will probably wait for the budget on November 26. This budget is expected to involve fiscal tightening, which would act as a drag on growth and inflation. This gives the BoE more justification to begin easing monetary policy shortly after.
For derivatives traders, this points towards positioning for lower UK interest rates. Interest rate swaps and SONIA futures that price in cuts for December 2025 and into 2026 could be attractive. The market is currently pricing in a bit more than a 60% chance of a December cut, which means there is still value if the data continues to soften and a cut becomes a certainty.
Looking Further Ahead
Looking further ahead, we believe the BoE will cut rates at least three more times in 2026, which is more than the market currently expects. The easing in the labour market, a major change from the tightness seen in 2023 and 2024, should continue to weaken wage pressures. This will be the key to bringing down the still-elevated services inflation.
This policy path is also likely to weigh on the pound sterling. Traders could consider strategies that benefit from a weaker GBP, such as buying put options on the currency. The policy divergence between a cutting BoE and a potentially more hesitant US Federal Reserve could create opportunities, particularly in the GBP/USD pair.
