Client Update - 19th December 2025

Responding to an interest rate cut by the US Federal Reserve (Fed) last week, the Bank of England (BoE) cut interest rates yesterday by 0.25%. Commentary focussed on slow growth and falling inflation, with the main area of concern being the economic growth forecasts.

It was not exactly reassuring to see the BoE Monetary Policy Committee (MPC) vote five to four in favour of a sixth rate cut since the summer of 2024, as it forecast that inflation is likely to fall close to its 2% target in the second quarter of 2026. This gives a somewhat mixed message.

Andrew Bailey, BoE governor, said he saw scope for “some additional policy easing” but added that the key question was whether inflation settled at the central bank’s target in an “enduring way”. “We’ve passed the recent peak in inflation, and it continues to fall, so we have cut interest rates for the sixth time to 3.75%,” Bailey said. “We still think rates are on a gradual path downward. But with every cut we make, how much further we go becomes a closer call.”

The outlook for global equities continues to look attractive with a one-year outlook, as global developed markets gradually cutting interest rates tends to support portfolio values.

The move from the BoE follows official data this week that pointed to a slowing economy, with inflation easing more than expected in November to 3.2% - good, however the unemployment rate climbed to a four-year high of 5.1% in the three months to October - bad.

Bailey’s remarks indicate that the central bank is approaching the end of its current rate-cutting cycle. Market traders continue to expect another 0.25% to 0.5% of interest rate cuts by the end of next year but at a slightly slower pace. As the vote suggests, the meeting exposed persistent divisions on the MPC, as rate-setters debate whether to prioritise boosting anaemic growth or containing inflation. The majority of the MPC felt the “disinflation process was on track”, however the members who voted to hold rates placed more emphasis on the possibility of “prolonged inflation persistence”.

Forward-looking wage indicators remain “elevated”, with BoE agents suggested wage price inflation for 2026 of 3.5%. The central bank said policies announced in last month’s Budget to contain increases in the cost of living are set to help reduce headline inflation next year, lopping around a half point from CPI inflation in April. Subdued economic growth and a weakening jobs market will also play a part in bringing down inflation.

Over in the US, the pattern was mirrored, as the Fed delivered a third consecutive interest-rate cut last week and interestingly maintained their outlook for just one further rate cut in 2026.

Uncertainty within the Fed almost matched the Bank of England, as the Federal Open Market Committee (FOMC) voted 9-3 to lower the benchmark federal funds rate by a quarter point to a range of 3.5%-3.75%. It also subtly altered the wording of its statement suggesting greater uncertainty about when it might cut rates again as Fed Chair Jerome Powell suggested they had now done enough to bolster the economy against the threat to employment while leaving rates high enough to tackle inflation.

The result marked the first time since 2019 that three officials voted against a policy decision, with dissents on both ends of the policy spectrum, with two members wanting no rate cut and one member wanting a 0.5% cut. This disagreement highlights divisions among policymakers that have emerged over whether weakness in the labour market (suggesting further supportive rate cuts are required) or stubborn inflation (meaning no further rate cuts) should actually be the focal point for the Fed. This sounds familiar to the key issue on this side of the Atlantic.

Added to this the inflationary effects of Trumps tariffs although Powell stated that he expected the worst of the tariff inflationary pressures to pass and, in his press conference, Powell said he expected the impact of tariffs to fade next year. “Let’s assume there are no major new tariff announcements — inflation from goods should peak in the first quarter,” he said.

This will be my last update of 2025, and I will write again on 9th January 2026. I am very pleased that 2025 has turned out to be a very strong year for portfolio performance and the year has been another lesson that despite short term “noise”, staying calm and maintaining a sensible diversified portfolio has proven better than trying to time markets. I have no doubt that Trump will throw further spanners into the works in the coming year, however if we remain risk aware, and nimble in our portfolio allocations, an environment of central bank interest rate cuts and deregulation in the US can bring further positive news for investors in 2026. I hope that you have a lovely Christmas break with your family, and I wish you and yours a very prosperous New Year – we will do our best to help you out on this point. Thank you for the trust you place in us, do look after yourselves. Merry Christmas.