Falling inflation makes a cut to interest rates certain
Professor Joe Nellis December 17th 2025
Professor Joe Nellis is economic adviser at MHA, the accountancy and advisory firm.
Inflation in the UK dropped to 3.2% in November, providing a clear indication that the intense price pressures of the recent inflationary cycle are continuing to ease, and making it almost certain that the Bank of England will cut interest rates when the Monetary Policy Committee meets tomorrow. The decline reflects softer goods inflation, stabilising energy costs and slowing food prices, even as services inflation remains the key area to watch.
With the UK currently holding the highest interest rates in the G7, it’s crucial for British exports that this begins to reduce. High interest rates strengthen Sterling against other currencies, increasing the price of British exports, and a global environment of trade protectionism only serves to compound this. To make British exports competitive in international markets and boost UK trade, lower interest rates is imperative.
For businesses, today’s figure represents a meaningful step toward a more predictable operating environment. Although still above the Bank of England’s 2% target, year-on-year inflation is now at its lowest since March.
This signals that the worst of the cost surge has passed, allowing companies to plan with greater confidence and reduced pricing volatility. With wage growth cooling since February, domestic cost pressures are moderating — a trend that should help anchor inflation further over the coming year.
If the disinflation trend holds, the UK will steadily move to a more stable inflation environment during 2026, laying the groundwork for a more supportive climate in the months ahead. That would create space for real wage improvements (even as wage growth cools), better consumer sentiment and a gradual pick-up in investment decisions that have been delayed during the high-inflation period.
"However, businesses should remain alert to risks: services inflation, global energy uncertainty and geopolitical tensions could still disrupt the inflation trajectory."
