Bank of England (BoE) Preview: A Hawkish Cut in a Stagnating Economy? Implications for the GBP & FTSE 100

[Ben Graham]

The Bank of England’s (BoE) final Monetary Policy Committee (MPC) meeting of 2025, scheduled for December 18, arrives amid strong conviction from financial markets: a festive interest rate cut is imminent. After a recent pause, the BoE is widely expected to resume its easing cycle, a move necessitated by a stalling UK economy and confirmed disinflationary signals.

However, the decision is far from unanimous, and the resulting vote split and crucially, the forward guidance that accompanies it and will determine the market reaction and the economic outlook for 2026.

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The Potential Decision: A Narrow Rate Cut to 3.75%

The overwhelming expectation, priced in by over 90% of the market, is for the MPC to vote for a 25 basis point (bp) cut, lowering the Bank Rate from 4.00% to 3.75%. This would mark the central bank's fourth rate cut of the year.

This move follows a decision to keep rates unchanged in November, when Governor Andrew Bailey said he needed more proof that inflation was truly slowing down before making any changes.

Weak Growth: UK GDP contracted by 0.1% in October, missing forecasts and confirming the economy's anaemic performance since mid-year. Economic growth is expected to remain weak well into 2026.

Soft Labour Market: Unemployment has crept up to 5%, hiring surveys remain weak, and wage growth, a key indicator for underlying inflation, is rapidly slowing toward more manageable levels.

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Source: ING Think

Cooling Inflation: Headline Consumer Price Index (CPI) has fallen to 3.6%, generally tracking the BoE’s projections.

Despite these strong reasons to cut rates, the decision will likely be very close, with a predicted 5-to-4 vote. Governor Bailey is expected to be the deciding vote, likely siding with the group that favors lower rates (the "dovish" camp). This sharp division among the voters highlights just how difficult the current economic situation is for the central bank to manage.

Given the split and the challenges facing the BoE a ‘hawkish cut’ may be the compromise. The Bank will deliver the 25bps reduction to support growth but will utilize the meeting minutes and the Governor's press conference to issue cautious guidance.

Message: "We are adjusting the level of restriction, not stimulating the economy."

Guidance: They will likely signal that future cuts are not automatic and will depend on data, specifically services inflation. This is designed to prevent the market from pricing in an aggressive 50bps cut cycle that could devalue the Pound too rapidly.

I could of course be wrong but this would seem like the most logical step for the BoE.

Market Implications: Pricing the Pivot

Market participants have aggressively positioned for this outcome, but the nuance of the decision will determine price action across asset classes.

Sterling (GBP) Outlook

The Pound is trading in a precarious range, heavily influenced by the divergence between the UK’s stagnation and the US’s relative resilience.

• GBP/USD (Cable): Currently trading near 1.3360-1.3400. The pair has been supported recently by a broadly weaker US Dollar (following the Fed’s dovish signals).
  • Reaction to Cut: A "dovish cut" (cut + signal of rapid future easing) could see GBP/USD break support at 1.3280. A "hawkish cut" (cut + caution) would likely see the pair test resistance at 1.3420-1.3500.
  • Strategic View: The medium-term outlook for GBP is negative due to the weak growth fundamentals (GDP -0.1%) and the correlation to risk-off sentiment. If the UK enters a technical recession while the US achieves a soft landing, the yield differential will move against Sterling.

GBP/USD Daily Chart, December 16, 2025

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Source: TradingView (click to enlarge)

• EUR/GBP: With the European Central Bank (ECB) expected to hold rates in December , a BoE cut widens the policy divergence in favor of the Euro. This could put upward pressure on EUR/GBP.

Gilt Markets (Government Bonds)

The Gilt market is poised for a "bull steepening" of the yield curve.

• Short End (2-Year): Yields are expected to fall as they track the reduction in the Bank Rate to 3.75%.
• Long End (10-Year): Goldman Sachs forecasts 10-year yields to fall to 4.25% by year-end and 4.00% by end-2026. However, concerns about the fiscal deficit (increased borrowing in the Reeves budget) provide a floor to how far long-term yields can fall.

FTSE 100: The impact is mixed. While lower rates help, a stronger Pound (if the cut is hawkish) hurts the overseas earnings of the large-cap exporters. Conversely, if the Pound falls, the FTSE 100 typically outperforms.

FTSE 100 Daily Chart, December 16, 2025

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Source: TradingView (click to enlarge)

Challenges and Risks for the Bank of England Moving Forward

The Bank of England's Three Big Risks In 2026, the Bank of England faces a difficult situation where it must choose between three dangerous paths, often called a "trilemma."

Risk 1: Causing a Recession If the bank is too cautious and cuts interest rates too slowly, the slight economic shrinkage we saw in October could turn into a serious recession. This would likely cause unemployment to shoot up past 5.5%, forcing the bank to make panic cuts later, which would make people lose trust in the economy.

Risk 2: Letting Inflation Return On the other hand, if the bank cuts rates too quickly while the government’s new budget raises business costs, inflation could get stuck at a high level of 3% to 4%. This would make everything more expensive for longer and might force the bank to suddenly raise rates again—a chaotic cycle similar to the economic trouble of the 1970s.

Risk 3: Corporate Bankruptcy Finally, there is a risk to businesses. Although banks are currently safe, many companies need to refinance their debts in 2026. If interest rates stay high, these companies might not be able to afford their loans and could go bankrupt. A wave of business failures would eventually hurt the banks that lent them money.

Final Verdict

Market participants should prepare for a rate cut that feels "hawkish" in its delivery. The BoE will cut, but they will promise nothing regarding the speed of future easing.

This creates a complex environment for Sterling, which may struggle to find direction until the 2026 inflation data clarifies the path to the terminal rate. The era of 4% interest rates is ending; the era of managing the "stagflation exit" has begun.

Follow Zain on Twitter/X for Additional Market News and Insights @zvawda

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