The Bank of England is widely expected to deliver an early Christmas gift to borrowers tomorrow, with a pivotal interest rate cut forecast following a sharper-than-expected fall in inflation. This move could signal the start of a significant shift in monetary policy, with major implications for savers, mortgage holders, and the UK economy throughout 2026.
Inflation Data Paves the Way for Monetary Easing
Official figures from the Office for National Statistics revealed that Consumer Prices Index (CPI) inflation dropped to 3.2% in November, down from 3.6% in October. This marks the lowest level since March and came in significantly below the Bank's own projections, strengthening the case for immediate action.
The decline was driven by a range of factors, including a notable easing in food price inflation, softer core goods prices, and substantial downward contributions from volatile categories such as clothing, air fares, and accommodation services. Matt Swannell, Chief Economic Advisor to the EY ITEM Club, noted that base effects from last year's tobacco duty rise also helped pull the headline rate lower.
Market Expectations and Expert Commentary
Financial markets and economists now consider a quarter-point reduction in the Bank Rate to 3.75% a near certainty at tomorrow's Monetary Policy Committee (MPC) meeting. City traders have heightened their expectations for 2026, pricing in a 72% chance of three further cuts, which could see the base rate fall to around 3% by the end of next year.
Anna Leach, Chief Economist at the Institute of Directors, stated that the decisive fall in inflation "increases the likelihood of a welcome interest rate cut tomorrow." Some analysts have even suggested a shock 0.5% 'mega-cut' cannot be entirely ruled out, though most anticipate the Bank will proceed cautiously with a standard quarter-point move.
Consequences for Borrowers, Savers, and the Treasury
The anticipation of lower rates has already prompted high street banks and building societies to reduce the cost of new fixed-rate mortgages, saving prospective home buyers hundreds of pounds annually. However, analysts warn that relief may be gradual and uneven across the market, and savers are likely to see returns squeezed as interest rates fall.
In a separate positive development for the Treasury, government borrowing costs are also declining, which is set to save billions in interest payments—a favourable turn for Chancellor Rachel Reeves. Samuel Mather-Holgate of Mather and Murray Financial suggested that Reeves could take political credit if a larger cut materialises, potentially helping to "shock the economy into life" after the festive period.
Looking ahead, experts predict inflation will continue its downward trend through 2026, supported by easing food and energy pressures, lower wholesale costs, and government measures on domestic energy bills. However, services inflation is expected to remain more stubborn, slowing only gradually as the impacts of past wage growth and policy changes fade.
