UK economy shows mixed signals as Bank of England cuts interest rates
The UK economy continues to show a mixed picture, with recent data highlighting both relief for households and ongoing challenges for businesses.
Inflation slows
Consumer price inflation fell to 3.2% in November, down from 3.6% the previous month.
The drop was largely driven by lower prices for food, clothing, and alcohol, with particularly large decreases in cakes, biscuits, and breakfast cereals. This has perhaps provided some respite for households ahead of the festive season.
Labour market softens
The unemployment rate rose to 5.1% in the three months to October, with younger workers hardest hit as youth unemployment has increased by 85,000.
These figures likely reflect the higher employment costs that came into effect in April 2025 and many businesses may have adjusted or delayed hiring plans while waiting to see what would be contained in the recent Budget.
Wage growth is still above inflation, which may be making employers cautious about hiring, though the impact could ease as private sector pay rises appear to be slowing.
Economic growth remains fragile
Official figures show the UK economy contracted by 0.1% in October and over the three months to October.
Weakness in the production sector, particularly vehicle manufacturing which was affected by the Jaguar Land Rover cyber-attack, and flat growth in services contributed to this slowdown.
It seems likely that both consumer and business spending was dampened by uncertainty ahead of the Budget.
Interest rate cut
In response to these conditions, the Bank of England has reduced its base rate from 4% to 3.75%.
The cut aims, in part, to support growth by lowering borrowing costs. Where you have variable rate borrowings this could be good news.
As the banks adjust to the new rate, it may also be a good time to consider whether refinancing could lower your business’ costs.
Energy regulator Ofgem has announced a 4% increase in the energy price cap for the period covering 1 October to 31 December 2026. This increase reflects higher wholesale gas prices due to the ongoing conflict in the Middle East, with volatile global gas markets remaining the dominant driver of price changes.
UK businesses are facing a “cost of business crisis”, according to the British Chambers of Commerce (BCC). Its new cost-stack calculator shows government policy alone has pushed up an average firm's expenses by 70% over the past decade, adding roughly £827,000 a year in costs for a typical mid-sized business. About a quarter of the rise stems from the increase in employer National Insurance contributions, with the higher minimum wage and mandatory pension auto-enrolment also major contributors.