BoE delivers pre-Christmas rate cut as economy stalls

Bank of England policymakers delivered a pre-Christmas rate cut in a narrow vote, a move that some commentators dubbed the 'Santa cut.' The decision leaves the central bank on a path of further easing next year even as officials acknowledge a subdued economy. Governor Andrew Bailey was the swing vote after saying the UK had 'passed the peak of inflation' and that the 2% target now looked attainable in April rather than by early 2027.

Bailey said, "We're going to come back to target sooner than we thought. So that's encouraging." He added: "Looking forwards, I do think we'll continue to have something of a gradual downward path... the calls do get closer." The Monetary Policy Committee split was reflected in a market view that roughly two more reductions were priced in for 2024, though many uncertainties remain about the pace of future moves.

The economy remains lackluster, the Bank said, with growth not expected to pick up in the current quarter. Budget measures aimed at containing inflation helped the decision, the governor said, though he cautioned that uncertainty around the Budget had previously clouded the outlook. Bailey identified an unusually high rate of savings as holding back the economy, driven in particular by older savers. 'How confident and cautious' people feel about the global and local economy does affect savings, he said, and he did not seek to be judgmental about how much people save.

Analysts say the cut is intended to lift sentiment and spur spending and investment, but that a single move is unlikely to unlock a durable rebound without more sustained momentum. Markets and economists have tied the path of policy to data on inflation, wages, and consumer spending, with inflation expected to drift lower but still unevenly across components.

Opposition Leader Kemi Badenoch reacted by saying the cuts show the economy is on "life support" and that rate reductions are "CPR". The remark reflects a political backdrop to a policy shift that has broader implications for households and business confidence as 2024 begins.

The Bank’s messaging has emphasized that any further reductions will depend on incoming data. Some MPC members have debated what a normal policy rate would look like, with some signaling a level around 3%. For now, the Bank says the next moves will be data-driven and that the inflation outlook remains the guiding light. A lack of momentum in household spending, a fragile global outlook, and the persistence of supply-side challenges mean the road back to 2% may be gradual and uneven.

In the near term, economists expect the Bank to proceed cautiously, weighing any further cuts against the risk that cheaper credit could reignite inflation if new pressures emerge. Still, the policy shift underscores a barometer of sentiment: that while inflation has cooled, the economy needs more than one pre-Christmas nudge to gain durable momentum ahead of next year’s outlook.