Risks Skewed to Slower But Deeper Easing Cycle at Bank of England After 25bps Rate Cut Thursday, Says Deutsche Bank

08:58 AM EST, 12/18/2025 (MT Newswires) -- The Bank of England delivered its fourth rate cut of the year, reducing 25bps and taking Bank Rate to 3.75% on Thursday, as expected, said Sanjay Raja, chief United Kingdom Economist at Deutsche Bank.

As has been a long-standing theme for the BoE, divisions within the Monetary Policy Committee remain, noted Raja. The December decision came with another split vote, with five members voting for a quarter-point rate cut, and four opting to hold Bank Rate at 4.0%.

It's now been more than four years since investors had a unanimous decision. But as the U.K. inches its way toward a more 'neutral' policy setting, Deutsche Bank thinks policy divisions will narrow over 2026.

The Bank Rate is inching its way toward a more 'neutral' policy setting, stated Raja. The scope for more rate cuts is limited, with the BoE sending its more explicit message yet on the path for policy: "judgements around further policy easing will become a closer call".

The trade-off between a deteriorating labor market and falling inflation will complicate the MPC's path ahead, according to Deutsche Bank. Despite a subtle push to shift away from a quarterly pace of rate cuts, many on the MPC continue to put more weight on downside risks to activity and the labour market.

These weights will continually shift as investors get more data, especially as concerns around "a more rapid loosening in the labour market" rise, added the bank. The MPC is shifting more toward a data-dependent approach.

Bank Rate remains on a downward trajectory. Deutsche Bank expected three things heading into the Bank's final meeting of the year: one, a quarter-point rate cut, two, a 5-4 vote split, and three, the MPC raising the bar for further rate cuts.

On Thursday, the bank got all three. Importantly, Deutsche Bank estimates the "precipitous" drop in the consumer price index next year alongside a deteriorating labor market to keep quarterly rate cuts in play next year.

The bank sticks to its long-standing call of two more rate cuts in 2026: one in March, and one in June, taking Bank Rate to 3.25%. Risks are skewed to a slower but deeper easing cycle.

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