Fed cuts - impact on Pound and BoE decision

The Fed’s move makes a Bank of England base rate cut next week a bit more likely, but it is not a done deal. The MPC will still be led by UK inflation, wage growth and how weak the data look, not what the Fed just did. We are not going back to the zero-rate era, but a 3-point-something Bank Rate for several years is plausible. It will feel a lot better than the 5% to 6% shock of the past few years, even if it is not free money again. If HSBC is right about 3% by 2026, that is good news for borrowers and for confidence in the housing market. Cheaper mortgages support prices and activity, but they will not override basics like incomes, lending standards and the lack of homes to buy.

We will find out on 18th if the Bank of England spreads some Christmas cheer before the year is out. Bearing in mind the next rate announcement isn’t until February, December disappointment could extend into the January blues for businesses and households alike. All eyes are on the Bank of England to add a boost to the economy given the government's record of failure.

Things are pointing in the right direction for the Bank of England to trim the base rate next week. They have always been very data-driven and a lot of the data is lending itself to a decision to cut. There is one pesky bit of data against us though, the outdated 2% inflation target. Hopefully the Christmas cheer gets the better of the Monetary Policy Committee.

We normally see the UK follow the US after 6 months but i believe we will see a rate reduction by the BOE on the 18th December of 0.25%. This will be a welcome break for homeowners in a Christmas period where most feel that they are being used as cash cows for the UK governments benefit splurge. The negative of this reduction will be that Labour will quickly manipulate this as propaganda to claim that the reckless budget is working, when we all know that the BOE are trying to single handedly save the UK. Whilst HSBC are predicting 3% by the end of 2026, i am feeling bolder and believe we will see 2.5% by the end of 2026 with lenders offering sub 3% mortgages by the end of summer 2026.

The Bank of England doesn't blindly follow the US Fed but the US central bank's decision to cut rates for the third time last night bodes well for a week today. The ultra-low rate party that raged for well over a decade is over but there is every prospect that we could be headed into an after-party where rates start with a three for a year or two. It will be less intense and shorter than the first but will still deliver a boost to the business community, borrowers and the wider property market. I also believe markets are underestimating the possibility of a 0.5% mega-cut in the base rate, as the Bank of England, for once, seeks to get ahead of the curve.

Markets now price in an 88% chance the Bank of England will cut from 4% to 3.75% next Thursday, reinforced by the Fed's move reducing policy divergence concerns. The Pound has been relatively stable around $1.33, as both central banks are easing but the Fed signals caution on further 2026 cuts. The "monetary afterparty" is very much on - HSBC forecasts Bank Rate reaching 3% by Q3 2026, with the OECD predicting 3.5% by mid-year. This represents a new neutral rather than a return to post-GFC zero rates. For borrowers, 2026 looks promising with typical mortgage rates expected to stabilize below 4%. However, 600,000 borrowers rolling off sub-3% fixes will still face payment increases. The property market outlook is cautiously optimistic with forecasts of 2-5% house price growth in 2026 as affordability improves with earnings outpacing inflation. Regional variations will be significant with Northern England and Scotland should outperform London and the Southeast.