Bank of England Poised for December Rate Cut: UBS Forecasts Explained

What the Latest UBS Analysis Means for UK Interest Rates, Inflation, and Sterling in December 2025

Overview

The Bank of England (BoE) is widely expected to reduce its base interest rate at its upcoming meeting in December 2025. According to a new analysis from UBS, a leading global financial institution, a 0.25 percentage point cut is on the cards, with significant implications for the UK economy, inflation, and the pound sterling.

Key Takeaways

1. UBS Predicts December Rate Cut

• UBS expects the BoE to lower its key interest rate by 25 basis points to 3.75% at the 18 December meeting.
• This move follows a period of steady rates in September and November.
• Financial markets have already priced in much of this cut, anticipating a reduction of around 21 basis points.

2. Why a Rate Cut Now?

• The BoE’s November meeting signalled a more dovish stance, with the Monetary Policy Committee (MPC) noting that inflation risks are now more balanced.
• Governor Andrew Bailey, who cast the deciding vote in November, highlighted the December meeting as a key decision point, with more economic data and the government’s budget available for review.

3. Economic Data Supports a Cut

• The latest labour market report for November showed a rise in unemployment and a slowdown in wage growth.
• October’s inflation figures matched the BoE’s expectations, indicating progress in reducing inflation.
• These trends support the case for a rate cut to help stimulate the economy.

4. Budget Impact and Inflation Outlook

• UBS does not expect the recent UK budget to significantly alter the BoE’s medium-term inflation outlook.
• While a reduction in energy bills will lower headline inflation by about 0.3 percentage points in April 2026, the BoE is likely to treat this as a one-off effect and focus on underlying inflation trends.

5. How Will the MPC Vote?

• UBS anticipates that Governor Bailey and possibly Claire Lombardelli will join the four MPC members who voted for a cut in November (Alan Taylor, Swati Dhingra, Dave Ramsden, and Sarah Breeden).
• This would leave three or four members favouring no change, suggesting a close vote.

6. What’s Next for Interest Rates?

• Looking ahead to 2026, UBS forecasts two further 25 basis point cuts in February and April, bringing the base rate down to 3.25%.
• Markets are currently pricing in a total of 54 basis points of cuts by the end of 2026.

7. Impact on the Pound

• UBS maintains a target of 0.8800 for EUR/GBP.
• The pound is expected to remain under pressure, with more downside risk during periods of market uncertainty than upside during rallies.

Conclusion

The Bank of England appears set to cut interest rates in December 2025, with UBS’s analysis pointing to further reductions in early 2026. Economic data, a balanced inflation outlook, and a dovish shift in policy all support this forecast. For businesses, investors, and consumers, the coming months will be crucial in shaping the UK’s economic trajectory.

Sources: (Investing.com, UBS.com)