1. The UK economy continues to struggle, with GDP growth expected to have contracted by 0.1% in October 2025, following a fall of 0.1% in September and no growth in August. Weak growth combined with softening inflation and labour market, saw the MPC vote to cut the Bank Rate from 4.00% to 3.75% in December in a 5-4 split vote. Many expected a more unified voting result given the recent disinflationary data and weak growth. However, the persistence of elevated inflation, particularly in services and salient areas such as food, combined with elevated wage growth saw four members vote to keep monetary policy at its current level. The other five members felt sufficient disinflationary progress has been made, although the scope for further easing is deemed to be limited. Neutral Bank Rate is viewed to be somewhere in the 3-4% range, although in the latest MPC minutes Alan Taylor said his view is at the lower end at 3.00%, though other MPC members are likely to have higher estimates, and the Governor recognised the ‘more limited space’ for policy easing.
2. This hawkish tone from the MPC had little impact on market interest rate expectations. Current rates broadly align with the MPC’s view that one or two further cuts in Bank Rate will occur in 2026.

 

3. Wage growth remains elevated but has moderated in recent months. In August to October 2025 annual growth in average regular earnings was 4.6% which is down from 5.4% in the same period in 2024. However, inflation remains elevated at 3.2%, and therefore inflation adjusted real earnings have also dropped to just 0.9% from 3.2% in the same period last year. ONS data also shows that real household disposable income decreased by 0.8% in Q3 2024 driven by increases on taxes on income and wealth.
4. Despite these pressures on households, final consumption expenditure increased by 0.9% in Q3 2024. This may be explained to some extent by the fall in the saving ratio from 10.2% to 9.5% in the period which has supported consumption. Despite this fall, the saving ratio remains elevated, which could reflect a structural change in the behaviour of households who are more cautious following the pandemic era. This will limit the growth prospects of the UK economy. Households are also borrowing more to support expenditure. Bank of England data show a 12.1% annual growth rate in credit card lending to households in November, the highest since January 2024.

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