Interest rate cut brings Christmas cheer but there's good reason for caution ahead

The economy may be stuttering, unemployment may be rising, inflation may be above target. But even so, the Bank of England delivered mortgage payers some welcome Christmas cheer on Thursday.

The quarter percentage point cut in interest rates was far from a surprise - the vast majority of economists and investors had expected the Bank to cut rates down from 4% to 3.75%. But even so, for those still struggling with the cost of living, the decision will help lighten the load through the winter months.

And, if the pricing in financial markets is anything to go by, there will be more cuts to come next year with one or maybe two more cuts priced in by investors.

Money latest: What interest rate decision means for you

There was Christmas cheer, too, for the chancellor, as the Bank revealed that it expected the measures in her budget to reduce inflation by half a percentage point next year, thanks largely to her measures to reduce energy bills and freeze fuel duty.

This is a hefty reduction - and means that far from having to wait until 2027 to see inflation come down to its 2% target, the Bank thinks the target will be hit as soon as next year. In short, the Bank has offered its seal of approval to Rachel Reeves, who said repeatedly that she was hoping to craft a non-inflationary budget.

However, deeper questions still remain. To what extent is Britain's low inflation a good news story - the fruit of clever monetary and fiscal policy - or something else? For there are some who worry that instead it bears all the hallmarks of economic slowdown. The slower the economy is growing, the less people spend and the lower inflation goes. And the Bank said it expected economic growth to drop to zero in the final quarter of the year.

There are also suspicions inside the Bank that one of the consequences of Donald Trump's trade war is that cheap imports from China, that would previously have flowed into the US, might be diverted to Europe. That would, on the one hand, push down consumer prices. However, it also risks pushing European manufacturers into the red as they struggle to compete.

On the other hand, there's a deeper worry that, having experienced high inflation for quite a few years, consumers are now so used to it that they might "bake" higher inflation into their personal mental maps. That could, in turn, mean they push for bigger annual wage increases, which in turn pushes inflation even higher. In short, the question as to whether the inflation genie is still out of the bottle remains.

Finally, there's the question about whether the trade war is a signal of something bigger: the end of the decades-long period of uber-globalisation. If it becomes more expensive to transport goods around the world, that implies that everything could gradually become more expensive.

Still, for the time being, the Bank has delivered its last piece of analysis and policymaking before the end of the year. And, for the most part, it's a set of measures and analysis that most people will be cheered by.

(c) Sky News 2025: Interest rate cut brings Christmas cheer but there's good reason for caution ahead