Raymond James | Updated: 2025-12-19
It has been a busy final week before Christmas with a flurry of data releases in addition to the Bank of England (BoE) and European Central Bank (ECB) holding their final meetings of the year. The BoE delivered a 25bps rate cut, though the decision was divided, with five of nine policymakers voting in favour of a cut. Meanwhile, Eurozone inflation held steady at 2.1%, giving ECB policymakers room to maintain their pause.
Looking back to the start of the week, UK unemployment rose to 5.1% in October, the highest level since March 2021, underscoring continued weakness in the labour market. Wage growth (excluding bonuses) in the three months to October slowed to 4.6%. The gradual increase in unemployment will be something the BoE needs to monitor and if we see a further deterioration in labour markets it could lead to further interest rate cuts.
On the day before the BoE meeting, UK inflation for November delivered a notable surprise. After October’s reading of 3.6%, November’s figure fell to 3.2%, below market expectations of 3.5%, the lowest level since its reacceleration in March. According to the Office for National Statistics (ONS), the decline was driven largely by food prices, particularly cakes, biscuits, confectionery and non-alcoholic beverages, which dropped 50bps to 4.2%. This is significantly lower than the 5.3% level previously estimated for December. UK equity markets responded positively, with the FTSE 100 rising 1.2% on the day.
This leads us nicely onto Thursday as in the afternoon, the BoE cut rates by 25bps to 3.75%. As mentioned in the beginning of the weekly, the vote was split five to four in favour of a cut. Governor Bailey changed course from the previous meeting, supporting a cut this time, but cautioned that the pace of cuts would slow, signalling no further moves are planned at the start of 2026. Despite inflation surprising to the downside, it still remains comfortably above target, with certain BoE members concerned about risks of sticky inflation. The market is only pricing in 1-2 cuts in 2026. Given weak economic growth and softening labour markets we can see potential for increased cuts next year.
The European Central Bank also met on Thursday and as expected, held rates at 2.15% for the fourth consecutive meeting. Inflation remains close to target, hovering at 2.1% in November. The ECB will take comfort from revised growth projections, supported by a widening current account surplus as European companies have successfully navigated US tariffs so far. President Christine Lagarde emphasised that the decision to pause was unanimous among policymakers but declined to provide forward guidance, citing caution amid an uncertain market environment.
