UK Economy News Today (3 December 2025): BoE Loosens Bank Rules as Services PMI, Tourism and Brexit Study Shape Outlook

LONDON — 3 December 2025

The UK economy opened December with a flurry of signals that are, all at once, mildly encouraging, politically awkward and structurally worrying.

On one side, the Bank of England has just relaxed key capital rules for banks, the services sector is still expanding, business closure rates have fallen to their lowest since 2016 and inbound tourism is booming into Christmas. ^[1]

On the other, the OECD, KPMG and a new Brexit study all point to an economy growing only slowly, carrying a heavy tax and cost burden and still smaller than it would have been without Brexit. ^[2]

Here’s a detailed look at the main UK economy stories today.

Bank of England Eases Capital Rules – and Tells Banks to Lend

The most eye‑catching policy move this week came from the Bank of England (BoE), which has trimmed the amount of core capital it expects major lenders to hold.

The BoE cut its benchmark Tier 1 capital requirement from 14% of risk‑weighted assets to 13%, its first reduction since the global financial crisis. ^[3]
The change follows a review of the capital framework and is explicitly framed as an attempt to support lending and economic growth, while still keeping banks resilient to shocks. ^[4]

At the same time, the BoE published its latest Financial Stability Report and stress‑test results:

The seven biggest lenders — Barclays, HSBC, Lloyds, NatWest, Santander UK, Standard Chartered and Nationwide — all passed the latest stress test. ^[5]
Under a hypothetical scenario including a 5% contraction in UK GDP, a 2% fall in world output, a 28% fall in domestic house prices, gas prices trebling and Bank Rate spiking to 8%, the banks’ aggregate Tier 1 capital ratio fell from 14% to a low point of about 11%, still leaving roughly £60 billion above minimum buffer requirements. ^[6]

Governor Andrew Bailey stressed that banks should use the extra headroom to support households and businesses rather than ramping up dividends and buybacks. Analysts at RBC and others described the reduction as “measured” and broadly in line with expectations. Bank shares rose modestly after the announcement, outpacing the wider FTSE 100. ^[7]

The message is clear: the BoE is trying to lean a little more towards growth without repeating pre‑crisis regulatory mistakes.

Growth Outlook: Slight Upgrade from OECD, Cautious Forecasts from KPMG

The big picture for the UK economy is still one of low but positive growth.

OECD: 2026 Upgrade, but Fiscal “Headwinds”

The OECD now expects:

UK GDP growth of 1.2% in 2026 (up from a previous forecast of 1.0%).
1.3% growth in 2027.
Inflation easing from around 3.5% in 2025 to 2.5% in 2026 and roughly 2.1% in 2027. ^[8]

The upgrade reflects the impact of Chancellor Rachel Reeves’s Autumn Budget, which combines extra public investment with higher taxes on workers, pension savers and investors. But the OECD also warns that tax rises and planned spending restraint will act as a drag on growth over the next two years, and that the UK’s limited fiscal space leaves it less able to respond to future shocks. ^[9]

KPMG: Growth Slows in 2026 Before Picking Up

KPMG’s December UK Economic Outlook paints a similar picture of subdued expansion:

GDP growth is projected at 1.4% in 2025, slowing to 1.0% in 2026, then edging back up to 1.4% in 2027.
Business investment is expected to grow, but at a moderate pace (around 2.2% in 2026).
Unemployment is forecast to rise from 4.8% this year to 5.2% in 2026. ^[10]

On inflation and interest rates, KPMG expects:

CPI inflation averaging 3.4% in 2025, falling to 2.1% in 2026.
The Bank of England to cut Bank Rate once more at its December meeting, ending 2025 at 3.75%, and then to 3.25% in 2026, where it stays in 2027. ^[11]

Crucially, the firm argues that UK interest rates are likely to settle at a higher level than in the US or eurozone, keeping borrowing costs relatively elevated unless the government can bolster fiscal credibility and curb long‑term spending pressures. ^[12]

Budget Politics: Starmer Faces PMQs as OECD Criticises Headwinds

Today’s Prime Minister’s Questions are set against a backdrop of renewed debate over Reeves’s Autumn Budget.

A widely syndicated piece from the Press Association, carried by outlets including The Independent, notes that Sir Keir Starmer will face questions about the Budget after the OECD warned that tax rises and lower public spending will act as a “headwind” to growth and that UK inflation will be the highest in the G7 this year. ^[13]

Opposition leader Kemi Badenoch has branded the package a “Budget for Benefits Street”, criticising the government for raising taxes while scrapping the two‑child benefit cap. Former prime minister Gordon Brown, writing elsewhere, has defended Reeves’s decision on child poverty grounds. ^[14]

The Office for Budget Responsibility (OBR) has also been dragged into the political row. Its outgoing chair Richard Hughes resigned after the watchdog’s assessment of the Budget was accidentally published early, and MPs have questioned whether the Treasury’s pre‑Budget messaging implied a bigger fiscal hole than OBR forecasts actually showed. ^[15]

OBR committee member Professor David Miles told MPs that he did not think the Chancellor’s comments were inconsistent with the watchdog’s analysis, describing the Budget instead as involving “very difficult choices” rather than an outright rupture from previous plans. ^[16]

In short: the politics of growth and tax are likely to dominate Westminster today, even as external forecasters nudge their growth projections slightly higher.

Inflation: Official CPI Is Falling, but Retailers Warn About 2026 Costs

Headline Inflation

The latest official figures show:

CPI inflation at 3.6% in October 2025, down from 3.8% in September.
Food price inflation at 4.9% in October, higher than in September but far below its post‑pandemic peaks. ^[17]

The House of Commons Library notes that inflation has fallen sharply from a high of 11.1% in October 2022, but is still running above the Bank of England’s 2% target. Economists surveyed by the Treasury expect inflation of around 3.5% at the end of this year, dropping towards 2.3% by late 2026. The OBR is slightly more pessimistic in the near term but also sees inflation returning close to target by 2027. ^[18]

Shop Prices: BRC Sees Cooling Now, Pressure Later

On the high street, the British Retail Consortium (BRC) reports that shop price inflation slowed to 0.6% year‑on‑year in November, down from 1.0% in October — the second consecutive month below 1%. Food prices were about 3% higher than a year earlier, while non‑food goods saw outright deflation. ^[19]

However, the BRC cautions that retailers face rising cost pressures in 2026 from higher wages and increased payroll and regulatory costs linked to previous tax and policy changes. Those could make it harder to keep shelf‑price inflation moving lower, especially if consumer demand remains weak. ^[20]

For households, the short‑term message is mildly positive — inflation is still falling — but the medium‑term picture is more complicated.

Services Sector and Labour Market: Growth, but Softer Orders and Jobs

Services remain the backbone of the UK economy, accounting for around 81% of output and 83% of employment. ^[21] Recent data show:

Services output rose 0.2% between August and September and was 1.6% higher in July–September than a year earlier. ^[22]

November PMI: Better Than Feared, Worse Than October

The latest S&P Global / CIPS UK services PMI for November came in at 51.3, down from 52.3 in October but above the 50.5 level many analysts had expected. Any reading above 50 indicates growth. ^[23]

Key points from the PMI and subsequent commentary:

Growth in the services sector slowed as firms reported weaker demand from both domestic and overseas clients.
Businesses cited subdued confidence and uncertainty ahead of last week’s Budget as reasons for delaying projects and investment. ^[24]
The survey signalled the sharpest fall in service‑sector employment since February, as companies trimmed staff amid higher labour costs and softer order books. ^[25]
Price pressures eased sharply: the rate of output price inflation fell to its lowest since early 2021, even as many firms continued to report elevated margins costs. ^[26]

Economists at EY Item Club argue that weaker growth, cooling price pressures and a softening labour market are all paving the way for a BoE rate cut before the Christmas break, echoing market expectations and KPMG’s forecast of another reduction in December. ^[27]

Business Closures Fall to Lowest Since 2016 – But Confidence Is Fragile

In more positive structural news, new ONS data show that business “death rates” fell in 2024:

Around 280,000 businesses closed last year, down from 310,000 in 2023.
That equates to 9.8% of active businesses, down from 10.8% — the lowest closure rate since 2016. ^[28]

The regional picture is uneven: the West Midlands recorded the highest closure rate (10.6%), while Northern Ireland had the lowest at 7.3%. At the same time, new business “births” ticked up slightly to 317,000, representing about 11.1% of active firms. ^[29]

Business groups welcomed the fall in closures and rise in high‑growth firms — almost 4.9% of businesses now qualify as high‑growth, the highest share since 2018 — but warned that the environment is still tough:

The British Chambers of Commerce called the figures “encouraging” given the difficult backdrop, but stressed that the government needs to do more to boost confidence and investment. ^[30]
The Federation of Small Businesses says many smaller firms still expect to downsize, close or sell over the next year, citing tax, labour costs and late payments as key worries. ^[31]

So while the headline statistics look better, the mood on the ground remains cautious.

Brexit Study: Economy 6–8% Smaller, Investment Down 12–18%

A new study led by researchers at King’s Business School, Stanford University, the BoE and the University of Nottingham grabbed attention today with a stark assessment of Brexit’s long‑term economic impact. ^[32]

Using both international comparisons and data from more than 7,000 firms in the Bank of England’s Decision Maker Panel survey, the researchers estimate that by early 2025:

UK GDP is between 6% and 8% lower than it would have been had the UK remained in the EU.
Business investment is 12–18% below the counterfactual path.
Employment and productivity are each about 3–4% lower than they would otherwise be. ^[33]

The authors describe Brexit as a “long and protracted shock” that raised uncertainty, depressed investment and diverted management time into planning and compliance rather than growth. More than half of firms at key points in the process listed Brexit among their top worries. ^[34]

The study underscores a crucial point: even if the short‑term data look better, structural drags from past policy choices are still weighing on the UK’s growth potential.

Tourism and Christmas Travel: A Bright Spot for Services

If you want a good‑news story in today’s data, tourism is it.

Record Visitor Numbers

According to travel industry analysis published today, inbound tourism to the UK is enjoying a powerful rebound:

Visitor numbers from key markets like the US, Germany, France, Spain, Australia and China are either matching or exceeding pre‑pandemic levels. ^[35]
US tourism is particularly strong: American visitors made around 5.6 million trips in 2024, a record, with spending projected to reach around £6.7 billion in 2025. A strong dollar, “set‑jetting” to locations from shows like The Crown and Bridgerton, and a packed conference calendar are all helping. ^[36]
Growth is also being driven by Indian visitors (boosted by student flows and business travel) and high‑spending tourists from Gulf states, helped by the UK’s Electronic Travel Authorisation scheme. ^[37]

This matters for the macro picture: tourism feeds into hospitality, retail, transport and cultural services, which together make up a large share of UK GDP.

Record Christmas Travel at UK Airports

A separate report today says UK airports are preparing for record‑breaking Christmas traffic:

More than 22 million passengers are expected to fly in and out of UK airports this December.
Heathrow alone anticipates around 7 million passengers during the month.
The Civil Aviation Authority (CAA) believes total air passengers in 2025 could exceed 300 million, after 90.2 million passed through UK airports in last year’s summer period alone. ^[38]

The surge provides a timely boost to the economy at the end of the year, even if it also means longer queues and higher demand for airport services.

Cyber Risk and Industrial Strategy: Long‑Term Growth Themes

Two other developments today speak to the UK’s long‑term growth strategy and vulnerabilities.

Cyber Attacks Costing About 0.5% of GDP

TechUK has highlighted government‑commissioned research into the economic cost of cyber attacks:

The average cost of a significant cyber‑attack for a UK business is estimated at about £195,000.
The annual cost to the UK of such attacks is put at £14.7 billion, roughly 0.5% of GDP.
Intellectual property and knowledge‑asset theft linked to cyber attacks is estimated to cost between £1 billion and £8.5 billion annually (about 0.04–0.30% of GDP). ^[39]
A hypothetical systemic cyber incident on the rail network could cost around £1.8 billion for a week of disruption, including nearly £1.4 billion in lost output — about 2.8% of weekly GDP. ^[40]

The findings support the government’s proposed Cyber Security and Resilience Bill and underline that digital vulnerabilities are now a macroeconomic issue as well as a security one.

Industrial Strategy Council Sets Up in Manchester

Separately, the government’s Industrial Strategy Advisory Council (ISAC) has announced a “landmark” partnership with the University of Manchester:

ISAC will base its headquarters in Manchester and tap into the university’s research via its innovation unit, Unit M.
The council will advise on the government’s modern industrial strategy, focusing on eight “growth‑driving” sectors including advanced manufacturing, clean energy, digital technologies, financial services and life sciences. ^[41]

Locating the council in Greater Manchester is intended to deepen ties with regional innovation clusters and give policy‑makers more insight into how to drive growth outside London and the South East.

Markets Today: FTSE Drifts Lower Near Record Highs, Pound Firmer

Equity and currency markets are reflecting this mix of cautious optimism and lingering risk.

The FTSE 100 spent Wednesday morning slightly in the red, trading just below 9,700, having closed almost flat yesterday at 9,701.80. It remains close to record highs near 10,000. TS2 Tech+1
Mid‑caps are weaker: the FTSE 250 was modestly down, and the AIM All‑Share fell around 0.9% yesterday. TS2 Tech+1
Sterling is a touch stronger, around $1.32–1.33, helped by better‑than‑expected services PMI data that suggest the economy is not as weak as feared. TS2 Tech+1

Investors are also watching the US Federal Reserve closely. Expectations of a rate cut by the Fed next week are supporting global risk appetite, but with the FTSE already close to record territory, traders in London are hesitant to push prices much higher without clearer signals on UK and US data. TS2 Tech+1

What Today’s UK Economy News Means for Households and Businesses

Pulling all of this together:

Borrowing costs are likely to fall gradually, not dramatically. Both market pricing and forecasts from KPMG and Goldman Sachs point to further BoE cuts, but not a return to the ultra‑low rates of the 2010s. Businesses and mortgage‑holders should expect interest rates to settle at a still‑significant – but more manageable – level over the next couple of years. ^[42]
Inflation is easing, but price stability isn’t secure yet. Official CPI is moving down, shop‑price inflation is close to zero, and service‑sector price measures are softening, which should relieve some pressure on real incomes. But higher wage costs, tax changes and structural issues (like Brexit‑related trade frictions) mean the risk of renewed price pressure hasn’t disappeared. ^[43]
The labour market is cooling, not collapsing. Unemployment is drifting up and service‑sector employment is falling, but redundancy rates remain near pre‑pandemic norms. That points to a labour market which is weaker than a year or two ago, but not in crisis. ^[44]
Structural drags are real. The Brexit investment study and OECD analysis both highlight that the UK is still dealing with deeper, long‑term constraints on its growth potential — from slower productivity growth to a high tax burden and limited fiscal room for manoeuvre. ^[45]
Services, tourism and innovation remain key bright spots. A still‑growing services sector, booming inbound tourism, record Christmas travel and a renewed focus on industrial strategy and innovation all suggest where future gains are most likely to come from. ^[46]

For now, the UK economy looks less fragile than it did a year ago — but only just. The BoE’s shift on bank capital, steady but modest growth forecasts, and stronger tourism are all welcome. Yet the combination of high taxes, still‑elevated inflation, tighter household budgets and the lasting impact of Brexit means policy‑makers will need more than one good Budget, or one good PMI print, to shift the country decisively onto a higher‑growth path.

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