Economic Background

Over the past three months, CPI inflation has dropped sharply to 3.2% in November, primarily due to falling food prices and coming in below the November Monetary Policy Report’s forecast. Services price inflation indicates that the disinflation process remains intact, as wage growth has moderated. The recent Autumn budget provided additional relief, with measures estimated to lower CPI inflation in April by around 0.5 percentage points. Combined with the recent decline in CPI, Bank staff now expect inflation to approach the 2% target more quickly, potentially reaching it in Q2 2026. The MPC also noted that the risk of persistent inflation has diminished, while concerns about weaker demand impacting medium-term inflation remain.

The labour market continues to show signs of deterioration, with the unemployment rate rising to 5.1%. The redundancy rate has reached its highest level since 2013 (excluding the pandemic period), though this metric is known for its volatility. Wage growth has continued to ease in the second half of 2025, especially in the private sector. While several indicators suggest ongoing moderation in pay growth, forward-looking wage indicators remain elevated, and the November DMP survey reported a slight increase in pay expectations, warranting some caution for the year ahead.

Monetary Policy Decision

The MPC voted by a narrow margin (5-4) to reduce the Bank Rate by 25 basis points to 3.75%. The split vote attracted market attention, as many participants had anticipated a more dovish outcome (6-3) following the recent downside surprise in inflation. Ahead of the decision, there was speculation about potential changes to forward guidance, such as removing the word “gradual” or referencing the neutral rate. Ultimately, the MPC maintained its guidance for a gradual downward path but added that “judgements around further policy easing will become a closer call,” likely reflecting the Bank Rate’s proximity to some members’ estimates of the neutral rate.

Members supporting the rate cut believed the disinflationary process was on track, with the key question now being how sustainably inflation will settle around the 2% target. Three of the five members saw diminishing upside risks to inflation but will continue to monitor labour market and wage data. The other two placed greater emphasis on downside risks to economic activity and inflation.

The four members who voted to keep rates unchanged highlighted structural factors and persistent inflation risks, despite acknowledging recent progress on disinflation. They argued that several indicators remain above levels consistent with the inflation target, justifying a more prolonged period of restrictive policy to mitigate upside risks.

Governor Bailey section in the minutes, as the swing voter, played a pivotal role. In the minutes, he noted that disinflation is now more established and upside risks have eased, but his focus has shifted to how inflation will settle around the target. He expressed concern about elevated wage levels, which are difficult to reconcile with the downward momentum in inflation. While he sees further scope for easing, the timing is more nuanced as the Bank Rate approaches the neutral rate.

Conclusion

The Bank of England’s decision to cut the Bank Rate was widely anticipated. Although the voting split was slightly more hawkish, Catherine Mann emphasised that her vote to keep rates unchanged was finely balanced. We concur with the MPC that the risk of persistent inflation has decreased, but we place greater emphasis on the risk to the medium-term target from weaker demand. Economic slack continues to build, and the labour market shows further signs of deterioration, both of which will weigh on wages and prices. The MPC’s adjustment to its forward guidance suggests a high bar for consecutive rate cuts, and it is unsurprising that members will become more cautious as the Bank Rate nears the neutral rate.

Accordingly, we maintain our longer duration bias in GBP strategies and will continue to target fixed-rate trades further out on the money market curve, where rates remain above the current overnight rate. But given the diverse views on the MPC and the implied data dependence of further monetary policy easing,  we believe market expectations of the timing and depth of rate cuts will be volatile and will thus look for market sell offs to increase fund duration.

For GBP cash investors, rate cuts imply lower cash yields, but elevated interest rates still offer attractive current returns. We expect future central bank actions to be further rate cuts, so investors may benefit from modestly extending duration, though we remain cautious given ongoing market uncertainty and volatility.

J.P. Morgan Global Liquidity GBP strategies are well positioned following the rate cut, thanks to our strategic decisions to extend weighted average maturity (WAM), diversify across instruments and sectors, and maintain high levels of liquidity.