On the last sitting day of Parliament in 2025, the Bank of England’s Monetary Policy Committee voted to cut interest rates for the fourth time in a year. This brought interest rates to their lowest level since December 2022. Further reductions in interest rates are expected in 2026 if inflation continues to fall (as many think it will).

The economic news in December did not bring much Christmas spirit, however, with a furthering weakening of the labour market and a fall in economic growth.

Interest rates cut following fall in inflation

On 18 December, the Bank of England’s Monetary Policy Committee (MPC) reduced its benchmark interest rate by 0.25 percentage points to 3.75%, as had been widely expected. The MPC voted by a majority of five to four in favour of lowering the rate. The interest rate since 2007 is shown in the chart below.

that interest rates have steadily fallen from 5.25 at the beginning of 2024 to 3.75 in December 2025. They had previously increased from 0.1% in December 2021 to 5.25% in August 2023 after a decade of low interest rates.
Source: Bank of England, Interest rates and Bank Rate, [accessed 7 August 2025]

The decision to lower interest rates reflected recent falls in inflation, which was at an eight-month low of 3.2% in November 2025. This was lower than economists had been expecting. The MPC concluded that the “disinflation process was on track”, with some members suggesting that the fiscal measures which were introduced in the Autumn Budget were likely to lead to a further reduction in inflation over coming months.

The tight vote reflected ongoing concerns over “prolonged inflation persistence”. Some members of the MPC suggested that interest rates should be maintained close to their current levels to mitigate the risk that inflation would remain persistently above the 2% inflation target.

The MPC suggested that interest rates would “continue on a gradual downward path” if inflation continued to fall, as expected, in 2026.  The average forecast among economists surveyed by the Treasury in December 2025 was for inflation to be 3.5% in the fourth quarter (Q4) of 2025, and 2.2% in Q4 2026. The OBR expects the inflation rate to fall to 2.1% in Q4 2026.

Labour market continues to weaken

In August to October 2025, the number of people who were unemployed rose to its highest level since 2015. Around 1.8 million people were unemployed in August to October 2025, which is over 300,000 more than in August to October 2024.

The unemployment rate also increased to 5.1% August to October 2025, which is the highest level since 2021. Unemployment is expected to remain at around 5.0% in 2026, with Bank of England and economists surveyed by the Treasury both forecasting that unemployment would be 5.0% in Q4 2026.

In August to October 2025, the youth unemployment rate rose to 16.0%, which was the highest rate since early 2015. The number of young people who are out of work remains a concern, with the former Secretary of State for Health and Social Care, Alan Milburn, launching his review into the rise in youth inactivity on 16 December 2025. The review will look at why the number of young people who are not in education, employment or training (NEET) has increased in recent years.

In July to September 2025, 946,000 people aged 16 to 24 were NEET, which was 12.7% of people in this age group. In Q3 2025, the number of people aged 16 to 24 who were NEET because they were economically inactive, meaning that they were not looking for or able to start work, was close to the highest level ever recorded since records began in 2001. These trends are shown in the charts below.

One chart shows the youth unemployment rate rising in recent years and to its highest value since 2015. The second chart shows the NEETs rate and also shows increases in recent years, and that rates are similar to where they were in 2015.
Source: ONS, Dataset A06 SA, 16 December 2025; Young people not in education, employment or training (NEET), UK, 20 November 2025

Economic growth was negative prior to the Budget

Economic growth in the UK unexpectedly fell by 0.1% in August to October 2025 compared with the previous three months, with economists forecasting flat growth. This was the first fall in GDP over a three-month period since the three months to December 2023.

The fall in UK GDP in August to October 2025 was driven by falls in both the production and construction sectors (growth in the production sector was severely affected by the cyber incident at Jaguar Land Rover). At the same time, growth in the services sector was flat. The services sector has been slowing since early 2025, and this was the first three-month period where it hasn’t experienced growth since December 2023.

The Bank of England has provisionally estimated that the measures announced in the Autumn Budget could lead to a small increase in GDP over the next two-to-three years.

About the author: Andy Powell is a senior researcher at the House of Commons Library specialising in labour market statistics.

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