Market Commentary 22nd December 2025 – from Naigil Johnson

The Bank of England cut the Bank Rate by 25 basis points to 3.75%, its lowest level since 2022. The decision marked the first rate cut since August and appeared to suggest increasing confidence that inflationary pressures are easing, alongside clearer signs of strain in the domestic economy.

The annual inflation rate in the UK slowed to 3.2% in November 2025, the lowest in eight months, compared to 3.6% in October and below forecasts. The slowdown was driven largely by softer food price inflation, reinforcing the view that price pressures are continuing to moderate, even if inflation remains above target.

The UK S&P Global Composite Purchasing Managers’ Index (PMI) pointed to the eighth consecutive month of expansion in the private sector, with momentum becoming more firmly established across the economy. Services activity expanded at a quicker pace and manufacturing moved further into expansion, recording its strongest performance in over a year.

The UK unemployment rate increased to 5.1% in the three months to October 2025, reaching its highest level since early 2021.

The European Central Bank (ECB) maintained its key interest rates for the fourth consecutive meeting, with the main refinancing rate remaining at 2.15% and the deposit facility rate holding at 2.0%.  Policymakers appeared to signal a steady stance, indicating that they will continue to follow a data-dependent and meeting-by-meeting approach.

The HCOB Flash Germany Composite PMI indicated that the private sector in Germany remained in expansion, but momentum softened in December. Growth was restrained by weaker underlying demand, with new business inflows stagnating and employment easing slightly, pointing to a more cautious economic environment.

In comparison, the HCOB France Composite PMI suggested the private sector in France was close to stagnation at the end of the year, following a brief return to growth in November. Within the economy, manufacturing showed signs of stabilisation after a period of contraction, while services growth slowed, reflecting ongoing fragility in domestic activity despite pockets of resilience.

The annual inflation rate in the US slowed to 2.7% in December, below forecasts of 3.1%.  The annual core Consumer Price Inflation (CPI), which excludes volatile items like food and energy, fell to 2.6%, its slowest pace in over two years. This appeared to reinforce expectations that underlying price pressures are continuing to ease and strengthened the case for potential Federal Reserve rate cuts. Markets are currently pricing a 25% chance of easing in January, rising to near certainty by April 2026.

The labour market showed modest job growth, with employment rising in health care and construction, while employment in the federal government sector continued to decline. Overall, employment levels remained broadly stable, reflecting a steady but less robust labour market than in previous months.

Meanwhile, the US unemployment rate increased, reaching its highest level since September 2021, consistent with the broader picture of slightly softening labour market conditions. Despite this, the number of unemployed and overall employment remained largely unchanged, suggesting that the US economy continues to adjust gradually rather than experience a sharp slowdown.

Industrial production in China continued to expand but at a slightly softer pace, reflecting a moderation in manufacturing and utility output. Mining activity, however, accelerated, providing a partial offset to the broader slowdown.

The Bank of Japan unanimously raised its key short-term interest rate by 25 basis points to 0.75% at its December meeting, raising it to the highest level in decades. This appeared to signal a gradual shift away from its long-standing ultra-loose stance.

Meanwhile, Japan’s annual inflation eased slightly to 2.9%, driven by slower food price increases, suggesting that price pressures are moderating even as the economy adjusts to tighter monetary conditions.

GBP / EUR – Current 1.1425 Previous 1.1390

The pound increased both against the dollar (+0.06%) and the euro (+0.31%) last week, as traders digested the latest monetary policy decision from the Bank of England.