UK economy remains mixed as interest rates are cut

UK economic update

The UK economy continues to present a mixed picture, with recent data offering some relief for households while businesses continue to face headwinds.

Inflation eases

Consumer price inflation fell to 3.2% in November, down from 3.6% in October.

The fall was driven largely by lower prices for food, clothing and alcohol. Notable reductions were seen in items such as cakes, biscuits and breakfast cereals, which may have provided some welcome relief for households ahead of the festive period.

Labour market softening

The unemployment rate increased to 5.1% in the three months to October. Younger workers have been most affected, with youth unemployment rising by 85,000.

This likely reflects higher employment costs introduced in April 2025. Many businesses may also have delayed or adjusted hiring plans while awaiting clarity from the recent Budget.

Although wage growth remains above inflation, rising pay costs may be making employers more cautious. There are signs, however, that private sector pay growth is beginning to slow.

Economic growth remains fragile

Official figures show the UK economy contracted by 0.1% in October, with output also falling over the three months to October.

The slowdown was driven by weakness in the production sector, particularly vehicle manufacturing, which was impacted by the Jaguar Land Rover cyber-attack. Growth in the services sector remained flat.

Uncertainty ahead of the Budget is also likely to have dampened both consumer and business spending.

Interest rate cut

In response to these conditions, the Bank of England has reduced the base rate from 4% to 3.75%.

The cut is intended to support economic growth by lowering borrowing costs. For businesses with variable-rate borrowing, this may provide some immediate relief.

As lenders adjust to the new rate, it may also be a good time to review existing finance arrangements to see whether refinancing could reduce costs.