December interest rate cut is ‘nailed on’ after UK GDP shrank in October
Economists are convinced that the Bank of England will respond to the UK’s weak economic performance by cutting interest rates next week.
The Bank’s monetary policy committee will make its final decision of the year on Thursday 18th December, and a rate cut to 3.75% appears highly likely now that the economy shrunk by 0.1% in October.
Ruth Gregory, deputy chief UK economist at Capital Economics, says:
The surprise 0.1% m/m contraction in the economy in October was especially disappointing given the increase in manufacturing output, which rebounded after September’s cyber-attack induced hit, and is a further reason to expect the Bank of England to cut interest rates next Thursday.
Suren Thiru, economics director at the ICAEW, says a pre-Christmas interest rate cut is “nailed on”:
“These figures confirm an off-colour October for the economy, with pre-Budget worries paralysing activity across key sectors, despite a boost to manufacturing from Jaguar Land Rover’s return to production.
“This dismal outturn may have been followed by a similarly turbulent November with the damage to business and consumer confidence from the frenzied speculation ahead of the Budget likely to have frozen wider economic activity.
“The aftereffects from the Budget may mean that the UK’s economic prospects are poorer over the near term, with the growing tax burden and a weakening jobs market likely to keep growth notably lower than the OBR expects.
“With these downbeat figures likely to further fuel fears among rate-setters over the health of the UK economy, a December policy loosening looks nailed on, particularly given the likely deflationary impact of the Budget.”
TUC general secretary Paul Nowak urges the Bank of England to help families and businesses with a rate cut:
“Bringing our economy back on track after 14 years of Tory chaos was never going to be straightforward. A volatile international context is not making this job any easier.
“After years of falling living standards, consumer spending is still very weak.
“The Government acted to boost household incomes at the Budget – it raised minimum wage, benefitting millions across the country, cut child poverty and funded energy payments to support living standards.
“The Bank of England should now recognise the impact that the living standards crisis has had on families’ and businesses’ finances and spending – and must deliver further cuts in interest rates next week”
According to my LSEG screen, an interest rate cut is an 89% chance. Last month, the Bank split 5-4 when they voted to leave rates on hold, so it only needs one voter (likely governor Andrew Bailey) to switch sides….
Updated at 02.51 EST
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Back in the financial markets, shares in Swiss bank UBS have hit a 17-year high, as investors grow confident that Swiss lawmakers will reach a compromise on proposals to impose tougher capital rules on the bank.
UBS’s shares are up 3.4% today at CHF34.63, the highest since early 2008.
The Financial Times explains why:
The stock has been sensitive for months to debate over the Swiss government’s June 2025 banking reform package, which could require UBS to hold up to $26bn in extra capital.
The bank has been particularly opposed to the proposal to force it to back its foreign subsidiaries with an extra $23bn in capital.
Investor sentiment has been boosted by local press reports of a compromise being proposed by multiple political parties. The multi-party proposal suggests broader political momentum behind a more moderate overhaul of the capital regime.
ShareChart: UK GDP over the last two yearsA chart showing UK GDP over the last two yearsShare
If the Bank of England is indeed about to cut interest rates several times, it could be a good time to be buying UK government debt.
Robert Timper, chief fixed income strategist at BCA Research, believes UK gilts will be the best-performing bond market in 2026, with the Bank of England most likely to surprise dovishly compared to other central banks, predicting:
“UK gilts will go from second to the best-performing bond market, backed by a dovish BoE and reduced fiscal concerns.”
Morgan Stanley economist Bruna Skarica predicts UK interest rates will be cut next week, and again at the Bank of England’s next meeting in early February.
Here’s why:
GDP surprised to the downside in October, coming in below our-sub consensus forecast. Auto production bounced back, but auto sales reversed their September surge.
White-collar services sectors have lost steam into year-end. Construction activity is weak, suggesting rather clearly that rates are still very restrictive. The UK economy seems to need some support. The BoE is running out of reasons not to provide it. We expect cuts in December and February.
Updated at 06.12 EST
XTB: UK economy faces stagflation risks
The UK economy faces stagflation risks, warns Kathleen Brooks, research director at XTB, following October’s economic contraction and the drop in UK exports.
Brooks says the disappointing UK GDP reading for October was “the dominant theme for markets this morning”.
Growth declined by 0.1%, instead of rising by 0.1%, as economists had forecast. This means that the UK economy has not grown since June, and there could be worse to come. The ONS, who compiled the data, said that services showed no growth, while construction fell by 0.3% and production also slipped by 0.5%.
Meanwhile, the total trade deficit widened by £4bn to £6.7bn in the three months to October. Trade in services was in a surplus and has been mostly stable and in a mild uptrend this year, while the trade in goods has seen a widening of the deficit in recent months.
It is important to read the GDP data (see 7.01am onwards) alongside the trade data (see 10.56am).
Together, they suggest that the UK economy buys more while it produces less. If the Labour government wants to boost growth it needs to break this pattern. Without a doubt, exceptionally high energy prices compared to our peers is hurting how much we can produce and manufacture in the UK. Without significantly changing how the UK charges for energy, the UK economy is doomed to a subdued economic performance for the long term.
The UK economy is now facing “the spectre of stagflation, the worst of all worlds”, she concludes.
Due to this, next week’s CPI data will be crucial for the outlook for UK rates and could cause significant volatility in the pound and the Gilt market.
The announcement that Google Deep Mind will build its materials science lab in the UK (see yesterday’s blog) is undoubtedly good news, but it is not enough to deflect from the damage that the current economic policy direction is taking us in.
ShareUK trade deficit widens as exports drop
Britain’s trade deficit has widened over the last quarter, due to a worrying drop in shipments to the rest of the world.
The UK’s total goods and services trade deficit widened by £4.0bn to £6.7bn in the three months to October, the Office for National Statistics reports.
That’s because total imports of goods rose by £1bn in the quarter, while goods exports decreased by £3bn – due to a £2bn drop in exports to the EU and a £1bn drop to the rest of the world.
Overall, the UK ran a £60.5bn deficit in goods in the August-October period, partly balanced by a services surplus of £53.8bn.
Illustration: ONSShareFTSE 100 hits four-week high
The UK stock market has shrugged off this morning’s weak GDP report, with the main indices up slightly.
The blue-chip FTSE 100 share index has hit a four-week higih this morning, and is currently up 20 points, or 0.2%, to 9723 points this morning.
Precious metals producers are the top risers; Fresnillo are up 4.6% and Endeavour Minerals are 3.1% higher, tracking a rise in the gold price this morning.
Joshua Mahony, chief market analyst at Scope Markets, explains:
European markets are on the rise in early trade today, feeding off the back of the record highs set in the S&P 500 yesterday. In the UK, the latest GDP data highlighted the detrimental effect of Rachel Reeves constant pre-budget flip-flopping, with the country shrinking by -0.1% in the three-months to October.
Notably, for that period we saw services sector activity fall by 0.3%, while construction shrank by 0.6%. Ultimately when looking at the FTSE 100, the strength seen this morning comes via two distinct areas; financials and miners. Crucially, the heavy commodity component of the index means that we typically see the index benefit from periods of strength like that seen across the likes of copper, gold, silver, and palladium.
Deutsche Bank predict two UK interest rate cuts in 2026, as well as a cut next week.
They say:
We stick to our call for two further rate cuts in 2026 – one in March, and another in June, taking Bank Rate to a terminal rate of 3.25% – broadly consistent with our current estimates of neutral.
We see risks skewed to a slightly slower but deeper easing cycle in 2026. That said, as we recently noted, the conditions for a more rapid easing cycle are emerging – though not our base case.
ShareUK public inflation expectations dip lower
The British public’s expectations for inflation over the next year have fallen, which could help nudge the Bank of England towards cutting interest rates next week.
The public’s median expectation for the rate of inflation in the year ahead fell to 3.5% from 3.6% in August, according to the Bank’s quarterly inflation attitudes survey.
For inflation in the longer term (eg in five years’ time), expectations fell to 3.7% from 3.8%.
While the Bank should welcome the drop, they might note that expectations are still well above their target of 2%.
The net satisfaction rate in the Bank’s own performance fell to -1%, down from 2% in August.
November’s GDP report could be “worse” than October’s, warns economist Simon French of Panmure Liberum (who agrees that a rate cut next week is highly likely).
Very soft UK GDP numbers for October -0.1% 3m/3m. Likely to be worse for November given the pre-Budget caution on display across the consumer sector. Nails on a rate cut for next week and raises the chances of mutiple cuts in H1 26. pic.twitter.com/XT64dGwVQS
— Simon French (@Frencheconomics) December 12, 2025
ShareNIESR: No growth since June
Today’s disappointing GDP figures show that the UK economy has seen no growth since June, points out the National Institute of Economic and Social Research.
NIESR associate economist Fergus Jimenez-England warns it is not yet clear whether last month’s budget will lead to stronger growth, saying:
This is especially concerning given that October’s GDP was lifted by a one-off rebound in manufacturing activity following the JLR cyber-attack.
Contractions in both services and construction indicate broad-based weakness, potentially reflecting uncertainty in the run-up to the Budget.
Recent survey data points to continued sluggishness for the remainder of the quarter, though with the Budget now behind us, there is scope for improvement in December.
Looking ahead, the Autumn Budget’s doubling of fiscal headroom should help reduce uncertainty over the coming year. Whether that will translate into stronger economic activity remains to be seen.”
Updated at 04.28 EST
Nationwide fined £44m for financial crime control failings
Oof! Britain’s financial regulator has hit lender Nationwide with a £44m fine for operating “inadequate anti-financial crime systems and controls” from October 2016 to July 2021.
The Financial Conduct Authority says Nationwide had ineffective systems for keeping up-to-date due diligence and risk assessments for all its personal current account customers and for monitoring their transactions.
It adds that Nationwide was also aware that some of those customers were using their personal accounts for business activity, in breach of its terms. As Nationwide didn’t, then, offer business current accounts it didn’t have the correct processes to manage potential financial crime risks.
Therese Chambers, joint executive director of enforcement and market oversight at the FCA, said:
‘Nationwide failed to get a proper grip of the financial crime risks lurking within its customer base. It took too long to address its flawed systems and weak controls, meaning red flags were missed with serious consequences.
These failings have cost the taxpayer £800,000 in Covid fraud, according to the FCA who say:
In one serious case, Nationwide missed opportunities to identify a customer using personal current accounts to receive fraudulent Covid furlough payments. The customer received 24 payments totalling £27.3m over 13 months, with £26.01m of this deposited over 8 days.
His Majesty’s Revenue & Customs (HMRC) recovered £26.5m, but approximately £800,000 remains unrecovered.
Updated at 04.27 EST
Goldman Sachs expects Bank policymakers to vote 6-3 to cut rates
Goldman Sachs predict the Bank of England will cut interest rates next week too.
In a note published yesterday, Goldman economists James Moberly suggests the Bank’s monetary policy committee could split 6-3 in favour of cutting borrowing costs, a month after voting 5-4 to leave rates on hold.
In this scenario, governor Andrew Bailey and deputy governor Clare Lombardelli would leave the ‘no change’ gang and join the cutters.
That would leave chief economist Huw Pill, and external members Megan Greene and Catherine Mann, voting to leave rates on hold due to concerns about inflation.
Moberly explains:
Since the last MPC meeting, the data have come in on the softer side, with a range of indicators pointing to further labour market weakening.
Although the measures introduced at the Budget are likely to generate a small near-term growth boost, they should notably lower inflation next year. As such, the Committee is very likely to cut Bank Rate by 25bp at next week’s (December 18) meeting. We expect a 6-3 vote split – with Pill, Greene, and Mann dissenting in favour of a hold – although the number of dissents (including Lombardelli’s vote) will likely depend on next week’s data.
That data will include the latest unemployment and wage reports, on Tuesday morning.
Economist Douglas McWilliams is concerned that the UK’s tech sector stumbled in October, with “computer programming, consultancy and related activities” shrinking by 3.6%.
Weak GDP data from is before the Budget, though the Chancellor/Treasury led discussion of tax rises pre Budget won’t have helped. Worst news is that the only previously booming sector, tech, has fallen back sharply with computer programming etc down 3.6% on the month.
— Douglas McWilliams (@DMcWilliams_UK) December 12, 2025
ShareDeutsche Bank: There’s a risk UK economy shrinks in Q4
There is a danger that the UK economy shrinks in the final quarter of the year, says Sanjay Raja, chief UK economist at Deutsche Bank.
That would put the UK on the brink of recession (two quarterly contractions in a row).
Raja warns that the road to the new year will be bumpy, saying:
In fact, after today’s data, our nowcasts for growth in the fourth quarter are now running even lower at 0% q/q (our official forecast is for a 0.1% q/q expansion). More worryingly, the skew around our nowcasts lean more negative than positive. And for the first time this year, we see some meaningful risk of a marginal quarterly contraction in real GDP.
If realised this would mark the first quarterly contraction in real GDP since Q4-23. Indeed, Budget uncertainty combined with weak hiring and rising unemployment fear will likely see spending and investment more subdued to end the year.
The good news is that Deutsche Bank expect the UK economy to shake off much of the uncertainty heading into the new year; they forecast growth of 0.5% in January-March 2026, meaning recession would be avoided.