The year-end climaxof global monetary policy has officially begun. As widely expected, the US Federal Reserve initiated a rate cut, lowering the benchmark interest rate by 25 basis points to a range of 3.5%–3.75%. The move has reshaped global capital flows and sent a clear signal to the UK market.
Following the decision, the British pound surged against the US dollar from 1.3308 to 1.3399 within 24 hours. Meanwhile, major UK banks had already positioned themselves in advance, triggering a full-scale “rate-cut price war” across the mortgage market.
All eyes are now on 18 December: Will the Bank of England cut rates as well? And how will interest rates evolve in 2026? Here is how major institutions are interpreting the outlook.
The Fed’s “Hawkish Rate Cut”
This rate cut met market expectations, pushing US equities higher and shifting investor attention toward the Fed’s potential path of monetary easing next year.
However, the Fed’s accompanying statement carried a distinctly hawkish tone, suggesting that the pace of future rate cuts may slow. Economic projections released on Wednesday indicate that only one additional rate cut may occur next year, with further adjustments dependent on incoming economic data. The Fed also announced a programme to purchase short-term Treasury bills to improve liquidity management.
This policy mix has provided support for the US dollar, limiting its downside and constraining the upside potential of GBP/USD. As expectations for further US rate cuts are gradually priced in and future easing space narrows, the interest rate differential in favour of sterling is likely to expand more slowly, making it difficult for the pound to break through key resistance levels in the short term.
That said, from an indirect perspective, the Fed’s rate cut still loosens global liquidity conditions. Combined with rising US equity markets and improved risk appetite, this has supported a short-term appreciation in the pound.
UK Market: Rate Cuts Are a Consensus — The Debate Is About Timing and Magnitude
The Fed’s rate cut, together with domestic UK economic data, has reinforced expectations of a rate cut by the Bank of England. The market is no longer debating whether rates will be cut, but rather how much and what the rate path will look like in 2026.
December Rate Cut Probability Rises to 88%: Inflation Eases the Way
A 25-basis-point rate cut in December has become the dominant market expectation, supported primarily by continued improvement in inflation data.
Latest figures show UK inflation fell to 3.6% in October 2025, down from 3.8% in September, continuing a sharp decline from the 41-year high of 11.1% recorded in October 2022. As inflation moves closer to the government’s 2% target, the need to maintain high interest rates is rapidly diminishing. Economists expect inflation to continue easing, potentially reaching 2.5% by the end of 2026.
The steady decline in inflation has opened clear room for monetary easing. On Wednesday, Bank of England Deputy Governor Clare Lombardelli told Parliament that the Autumn Budget released last month would help push inflation lower. Measures such as fuel duty caps and reduced household energy costs could lower inflation by 0.4–0.5 percentage points in the second quarter of 2026.
Independent assessments by the Office for Budget Responsibility (OBR) also indicate that the UK’s return to price stability is gaining momentum, with inflation expected to reach the Bank of England’s 2% target by 2027. Combined with a cooling labour market and weak economic growth, a policy consensus in favour of rate cuts has clearly emerged.
Mortgage Lenders Enter a Full-Blown “Rate War”
Alongside rising expectations of rate cuts, major UK mortgage lenders have moved quickly, igniting a market-wide “rate war”. Large banks including Barclays, Nationwide, Santander and NatWest have recently cut mortgage rates to capture market share.
According to the managing director of a major mortgage lender, the key driver behind these cuts is the widespread expectation that the Bank of England will lower its base rate by 25 basis points to 3.75% on 18 December. To secure high-quality borrowers, lenders have been forced to act early.
Mortgage advisers note that as this price war intensifies, a growing number of mortgage products may fall below 3.5% by January 2026. This could further stimulate housing demand and encourage financially capable first-time buyers to enter the market sooner.
This rate war is not accidental, but rather a form of advance pricing based on expectations of future policy. It reflects two key strategic considerations:
First, capturing market share: Cutting fixed-rate products ahead of the easing cycle helps attract owner-occupiers and buy-to-let investors, particularly in the five- and ten-year fixed-rate segments.
Second, hedging future risks: Lenders anticipate that as the base rate falls, the overall interest rate benchmark will move lower. Cutting rates early helps mitigate future margin compression and stabilise balance sheets by locking in long-term customers.
For borrowers, the benefits of lower base rates are already being felt. Lenders typically adjust pricing before official central bank decisions, explaining the recent wave of mortgage repricing. The impact varies by product type:
Fixed-rate mortgages: Some fixed rates are now as low as 3.55%, returning to levels last seen in 2022. Increased competition gives borrowers more choice and significantly reduces monthly repayments for the same loan amount.
Variable-rate mortgages: Borrowers on variable rates may see repayments fall quickly following a base rate cut, easing short-term cash flow pressure.
Borrowers nearing the end of fixed terms: This is an ideal window to remortgage. Compared with a few months ago, available rates are more attractive, offering long-term savings and helping avoid reverting to expensive standard variable rates (SVR).
In short, the early start of the rate war signals that borrowing costs have entered their lowest range in nearly two years.
The 2026 Rate Path: Where Will Terminal Rates Settle?
While a December rate cut is largely priced in, views diverge on the pace of easing and the terminal rate in 2026, which will directly shape mortgage costs over the next two years.
Morgan Stanley has revised its forecast, removing its expectation of a rate cut in March 2026 while maintaining cuts in February, April and June. It has also raised its terminal rate forecast to 3%, up from 2.75%, citing potential resilience in the UK economy and a possible recovery in the labour market in the second quarter of 2026.
Other institutions take a more aggressive view, arguing that UK GDP growth is likely to remain below trend and that inflation could fall faster than expected. Under this scenario, the Bank of England could cut rates to 3% or even lower in 2026 — below the market’s widely expected floor of 3.5%.
The core disagreement lies in differing views on labour market recovery and the speed of disinflation. Regardless of the exact path, one conclusion is clear: UK interest rates are set to trend lower in 2026, and the downward trajectory of mortgage costs is unlikely to change.
lansha Summary
The Fed’s rate cut, combined with easing inflation and stabilising growth in the UK, has brought the Bank of England to a pivotal moment. The 18 December policy decision will not only influence sterling but also set the tone for the UK mortgage and property markets in 2026.
For UK homebuyers and investors, the current period represents a clear policy window of opportunity. Mortgage lenders have already released early benefits through aggressive repricing, and an official rate cut by the Bank of England would further open the door to lower borrowing costs. Entering the market now allows buyers to secure today’s low rates while positioning themselves for continued easing ahead.
lansha will continue to monitor the Bank of England’s December meeting and provide timely analysis of policy signals and market implications.
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