Markets ended the year focused on diverging central bank policy decisions, particularly Japan’s continued move away from ultra-low interest rates.

The past week in financial markets was firmly shaped by central bank decisions, with policymakers setting the tone as we head into the final stretch of the year.

In the UK, the Bank of England cut interest rates by a quarter point to 3.75%. While the decision was widely anticipated following recent declines in inflation, the narrow 5-4 vote highlighted a clear division within the Monetary Policy Committee over the economic outlook. Lower borrowing costs should gradually ease pressure on mortgages and lend support to interest rate sensitive parts of the domestic economy, but the close vote suggests that further cuts are likely to be measured and data-dependent rather than part of a rapid easing cycle.

The UK move follows developments in the US the previous week, where softer inflation readings and weaker labour market data added to political and market pressure for lower interest rates. In contrast, the European Central Bank opted to keep policy unchanged last week, pointing to ongoing strength in services inflation.

Taken together, these decisions suggest that Western central banks are broadly aligned in direction, even if not in timing. This shared, cautious stance helps explain why currency and bond markets have remained relatively calm despite the steady flow of policy announcements.

Japan provided the main point of divergence. The Bank of Japan raised its policy rate to 0.75%, the highest level in three decades and another clear step away from the ultra-low rates that have characterised the Japanese economy for years. While the direct impact to UK investors may be limited, the decision matters primarily through its influence on global liquidity conditions and exchange rates, particularly if it encourages capital to flow back towards Japan.

Looking ahead, the coming week is notably quieter for the economic calendar as markets drift into the Christmas period. With few major data releases or policy decisions scheduled, trading volumes are likely to be thin and market moves may be more subdued. This seasonal pause offers a timely opportunity for us to take stock of the T. Bailey portfolios and reflect on the themes that are likely to shape markets when we report back in 2026.