Interest rates in focus - the week ahead

As the decks are cleared for Christmas, there’s a wealth of economic data for investors to focus on this week. Top of the agenda here in the UK will be the Bank of England’s final rate-setting decision of 2025.

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End of the rate-cutting cycle in sight

Just 18 months since the Bank of England started cutting interest rates, talk has shifted to when it will put monetary easing on pause again. Probably not this week, but soon, is the conventional wisdom.

There’s a 90% chance of a quarter-point rate cut this week to bring UK interest rates to 3.75%. But thereafter it’s a question of whether there will be one or two more cuts before rates find their neutral level at which policy neither boosts nor constrains economic activity.

The Bank’s rate-setters are weighing up conflicting data this week. Growth is stagnant at best. Last week, we learnt that GDP fell by 0.1% in October and in the three months to that month. That followed a similar fall in September. By itself that argues for lower rates.

But inflation remains persistently higher than the Bank’s 2% target. The latest reading was 3.6% and while there will be a modest improvement in November to 3.4%, economists believe that level of price growth argues for caution from the monetary policy committee.

The recent Budget also offered mixed messages for rate-setters. In the short-term a hike in government spending should boost the economy but, further out, tax rises will have the opposite effect. Unsurprisingly, the Bank is split down the middle, and Governor Andrew Bailey may well be called upon to use his casting vote on Thursday.

Data dump

Before we get to the rate decision, we will have seen key data on both growth and inflation in the UK. Tuesday brings jobs data while Wednesday serves up that November inflation reading. After the Bank makes its rate call, there will be retail sales data on Friday.

And it’s not just here that investors will have plenty of numbers to crunch. The US will provide not one but two months of jobs data on Tuesday as it plays catch up from its autumn government shut down. Those numbers will be scanned for evidence about whether last week’s third consecutive rate cut will be repeated next year.

With a new Federal Reserve chair due in the spring, there is speculation about the extent to which the Fed will start to fall in line behind the White House’s desire for cheaper borrowing costs.

Elsewhere, the Bank of Japan will announce its latest rate decision on Friday. And in Europe, expected inflation of 2.2% will focus the ECB on whether its rate-cutting cycle is also now at an end.

Bond vigilantes on high alert

Worries about US monetary policy lies behind a firming in expectations for long-dated bond yields, which reflect investors’ fears about future inflation. Were bond investors to demand higher compensation for holding fixed-income US government bonds, yields could rise back towards 5%, some analysts fear. That would make it hard for stock market investors to justify currently high equity market valuations.

Looking into 2026, therefore, investors are looking anxiously at the mix of earnings expectations (strong), valuations (historically high) and monetary policy (likely to become easier than above target inflation might imply). After three years of rising share prices, the outlook for next year is uncertain.

Alternatives in the spotlight

Worries about the outlook for equities and bonds have created a tailwind for some alternatives, notably precious metals. Gold is within a whisker of its all-time high, but the real star of the show in 2025 has been silver, which has doubled this year, and recently exceeded $60 an ounce for the first time.

Silver, unlike gold, is used in a range of industrial applications, from electronics to solar panels. So limited supply, coupled with investor demand and a reshaping of global energy provision have seen the junior precious metal soar.

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