Director Weekly  Bank of England rate-setters had an early Christmas present for business this week

The Bank rate now stands at 3.75%, its lowest point since January 2023. And as expected, Bank Governor Andrew Bailey was the swing voter in a split decision by the Monetary Policy Committee (MPC).

His shift reflects recent economic data that has consistently told a story of subdued confidence and therefore weaker inflationary pressure. Business and consumer surveys alike indicate extensive uncertainty and weak demand, while the unemployment rate has ticked up to 5.1%. Economic activity seems to be stalling. Just six weeks ago, the Bank expected GDP growth of 0.3% in Q4; now, it forecasts zero growth. That’s a big change in a short period of time.

The other important factor in the Governor’s decision was fresh evidence of falling inflation. The annual rate of CPI inflation fell to 3.2% in November 2025 from 3.6% in October – beyond the Bank’s expectations. A drop in food price inflation and the easing of services inflation were decisive.

Looking ahead to 2026, it seems likely that inflation will keep tracking down, meaning further rate cuts could follow – but the situation remains finely balanced. There’s residual concern that wage growth and services inflation both remain elevated.

And the recent Budget doesn’t necessarily help. The Bank’s assessment is that although measures such as cuts to home energy bills and a fuel duty freeze will cut 0.5% from inflation in 2026, additional public sector spending will result in marginally higher inflation in 2027 and 2028.

Assessing the outlook for 2026 more generally, four areas look critical.

1. How far will confidence recover? After an extraordinary period of policy uncertainty in the run-up to the Budget, directors will hope the government avoids generating more unnecessary uncertainty in 2026 – not least because the costs of doing business continues to soar. Tax rises announced in the 2024 Budget are still being digested, while significant new measures such as the reduction in the Writing Down Allowance, will kick in from April 2026. And, of course, employers are now confronted with the Employment Rights Act, which received Royal Assent on 18 December.
2. How will the global economy fare? Expectations for the global economy are for moderate growth of about 2.9-3.1%. However, there are risks: from geopolitical shocks to the risk of an AI correction, which could unleash widespread market volatility.
3. Can the UK seize new trade opportunities? While the government will continue to pursue trade deals around the world, and seek to mitigate the harm done by US tariffs, the biggest opportunities still lie in resetting the EU relationship. The announcement that the UK will rejoin the Erasmus scheme was welcome; the challenge will be finding ways to meaningfully increase trade without tying the UK into growth-limiting EU rules.
4. Will public sector spending reach the front line? The government has given the public sector significant budgets for the coming years. With business under pressure, it’s vital for the economy that money reaches the front line – so progress in areas including planning reform and infrastructure investment will be critical.

The wise men and women of the MPC have delivered one of the goodies at the top of many directors’ wish lists. Of course, lower interest rates are not a panacea for all the challenges facing businesses, but they will help – and give some reason, at least, for a little seasonal cheer as the year draws to its close.

Read the IoD’s reaction to the announcement that the UK is rejoining the EU’s Erasmus+ exchange scheme here.