The Bank of England cut interest rates to 3.75% at its meeting on Thursday, but the FTSE 100 gave up small earlier gains as markets interpreted comments from the monetary policy committee as suggesting another cut is not hot on its heels.
Reducing rates by a quarter of a per cent, it was the sixth reduction in the base rate since August 2024.
BoE Governor Andrew Bailey voted in support of a cut, resulting in a 5-4 majority within the MPC. This was the only change from the committee's last meeting in early November, when Bailey supported holding rates steady.
He explained that the 0.25% cut reflected the big fall in inflation from its 10% peak three years ago, down to 3.2% in the latest measure.
"We think that Bank Rate is likely to fall gradually further in future, but that will depend on whether variables like pay growth and services inflation continue to ease.
Guidance from the MPC kept the wording that interest rates are likely to continue on a "gradual downward path" but also that "judgements around further policy easing will become a closer call".
The MPC said it felt most jobs market data "had not suggested a rapid opening up of slack in the economy, even though the unemployment rate had continued to move higher".
Staff forecasts from the BoE now expect inflation to fall back towards target more quickly in the near term, apart from a temporary rise this month due to tobacco duty and airfares, before easing in the first quarter of 2026 to around 3% and "closer to 2%", ie bang on target, in the second quarter.
The Budget is seen as likely to cut inflation in April 2026 by around 0.5 percentage points.
Zero growth is now expected in the fourth quarter of this year, down from the November forecast of 0.3%.
Too cautious?
The fourth cut of the year reflects a mixed economic picture and the MPC's dilemma of having to "strike a delicate balance between supporting growth and taming inflation.., is not unique to the UK", said Brad Holland, director of investment strategy at JP Morgan Personal Investing.
“The cooling across the UK economy over recent months has been a cause for concern for many in the market," he said, adding that the BoE statement was clear that a gradual approach to the rate-cutting cycle remained in place.
"This may disappoint those who hope that faster rate cuts will spur economic growth and reduce borrowing costs, but with uncertainty still high, policymakers remain cautious."
Liam Daly, Cebr senior economist, agreed that the recent inflation and jobs numbers "strengthen the case for greater monetary policy support, especially coming off the back of a Budget containing some disinflationary measures but little to stimulate a lacklustre economic growth outlook”.
Stuart Morrison at the British Chambers of Commerce said the MPC "is likely to need more evidence that inflation is under control before agreeing to further rate cuts next year".
But with inflation set to fall to 2% by the middle of next year, barely any GDP growth and wage inflation being inflated by public sector wage rises, Jonathon Marchant, fund manager at Mattioli Woods, said "the fact that any of the members voted to hold interest rates under the current circumstances is perplexing".
Marchant said: "Lower interest rates are key to driving forward economic growth and central to the achievement of many of the government’s stated aims."
Going further, he said Governor Bailey could become "a more suitable candidate" for the "too late" moniker that US President Donald Trump has branded the Chair of the Federal Reserve for his cautious stance on cutting interest rates.
But the MPC's view that the Budget will lead to materially weaker inflation in 2026on inflation next year is "overly optimistic", said Matthew Ryan, head of market strategy at Ebury.
"We think that the committee is maintaining flexibility. Governor Bailey has kept the door open to further easing, while indicating that there is limited room for further cuts.
"The bank’s commitment to a gradual approach means that we think that a February cut is highly unlikely, although we expect the March meeting to be a ‘live’ one.
"We see one or two more cuts in 2026, but all will be dependent on incoming data."
** UPDATE: Adds economist and analyst comments **