The UK economy has shown signs of contraction, with a surprising 0.1% decline in October and forecasts indicating a potential recession by March 2025.

Concerns about long-term labor market issues, such as high sickness rates affecting workforce participation, have been identified as factors contributing to wage increases.

On December 19, 2024, the Bank of England decided to keep interest rates unchanged at 4.75%, despite rising inflation currently at 2.6%, which exceeds the bank's target of 2%.

Recent data revealed that UK consumer price inflation rose to 2.6% in November, marking the highest rate among G7 economies and slightly surpassing the Bank's previous forecasts.

There remains uncertainty about whether the economic slowdown is driven by weaker demand or supply chain issues, complicating the outlook.

This decision comes amid signs of an economic slowdown, prompting the Bank to adopt a cautious and gradual approach to monetary policy adjustments.

Critics of the Labour government's budget argue that increased business taxes may exacerbate inflation and hinder economic growth, while the government defends these measures as necessary for public finances.

While global inflation rates have decreased from pandemic highs, economists do not expect interest rates to return to the historically low levels seen after the 2008 financial crisis.

Market expectations for future interest rate cuts have shifted, with current pricing suggesting about 50 basis points of cuts, down from 70 basis points earlier in the week.

Bank Governor Andrew Bailey highlighted significant uncertainty regarding the impacts of recent budget measures and potential labor market adjustments, indicating that future policy decisions will be data-driven.

Governor Bailey emphasized the importance of meeting the 2% inflation target, suggesting that any future interest rate cuts would be gradual due to heightened economic uncertainty.

Mortgage rates are anticipated to rise, which could negatively impact homeowners and the broader economy as higher borrowing costs affect both businesses and consumer spending.