December 2025
Before we start with our economic update for the current period, the team at Chapters Financial hopes that you enjoy the festive period and that you have a great start to the new year in 2026.
The main topic of this update must be the Budget at the end of November 2025 and the announcements made. The lead up to the Budget was rife with speculation and even the Speaker of the House of Commons termed it the ‘hokey-cokey Budget’, commenting, ‘one minute it’s in, next minute it’s out’, in reference to the numerous leaks as the government tip-toed around its past manifesto pledges. We of course now know the results of the announcements, and we have detailed these further on our blog page. The Chancellor’s Spring Statement is now scheduled for 03 March 2026, although this should be only an update on the financial health of the UK, rather than any tax / allowance changes, although this is not guaranteed.
Reflecting on 2025, we have seen significant market volatility this year in most equity markets, particularly with the US tariff announcements in April 2025, and we do believe this volatility will continue.
From another angle, the opinions shared by both the Bank of England and the International Monetary Fund (IMF) recently regarding equity valuations, and possible over-valuations in some US tech areas, may well dampen markets. Therefore, in our opinion, we may continue to see volatility in the markets, and some further 'profit-taking' before the end of the year (as is periodically normal).
There is much to consider globally, not least with the recent events in the Middle East. As observations, some global areas (America / Germany / Japan as examples) are deliberately ‘running hot’ on their economies which in turn is fuelling some equity markets and we do not expect these positions to change in the near term although, as noted above, there are no guarantees. Russia and Ukraine are still firmly in the news having reached well into the third year of hostilities, and with what appears to be the stalling of negotiations to bring the conflict to an end. Increased spending on (national and collective) defence has been agreed over the next years, and it almost has a feel of returning to the ‘cold war’ of decades ago.
Changing of debt parameters
The objective of the now not so new Chancellor is to effectively redefine the way the UK's debt rules work going forward. The planned effect is to allow the Chancellor to borrow more money for the next five years. We are talking about up to £50bn extra to help pay for the planned spending ahead, such as infrastructure spending. The risk is that interest rates remain higher than expected, costing us more over time. Subsequently, borrowing costs have elevated further and have not deviated downwards, putting more cost and pressure on the UK's already squeezed budgets.
More can be found on our late 2024 blog here: 30-october-2024-budget-the-headline-changes
Economic data from home and abroad
Mid-December saw the Office for National Statistics (ONS) confirm that the Consumer Prices Index (CPI) reduced to 3.2% (from 3.6%) in the year to November 2025. This reduction from October was mainly due to lower food prices, along with falls in alcohol and clothing costs, amongst other items. The Bank of England target for UK inflation remains unchanged at 2.0%, and inflation is remaining above this level.
As a note, US inflation has increased slightly - consumer prices (before seasonal adjustment) increased to 3.0% over the 12 months to September 2025. However, the continued application of tariffs has seen some predict that US inflation will rise again.
The Bank of England reduced its base interest rate in early May 2025 to 4.25% (from 4.5%) and maintained this position for the rate decision in June 2025, thereafter cutting the rate again to 4.0% in August 2025, holding at 4.0% in November 2025 and cutting to 3.75% in December 2025, the lowest level since early 2023. In the final rate decision of 2025, the US Federal Reserve reduced the base rate to a range of 3.50-3.75% in December 2025, the lowest for three years. The Federal Reserve has indicated that this position may be held for a while looking forward.
It should be noted that higher interest rates are good news for savers, and some savings accounts are offering 4.0% - 4.5% pa gross plus. Look out for the AER rate pa (Annual Equivalent Rate) which show the real rate of interest being provided. Of course, higher interest rates are not so good for variable rate borrowers, and the days of cheap borrowing for individuals and nations are over, certainly in the shorter term.
As you might anticipate, many financial thoughts will be UK focused; however, the world is now a small place and many of these economic factors are occurring globally, as we enter a new era of higher costs, inflation, interest rates and the like. Increasing numbers of global conflicts remain constant at this time.
We have looked at some of these points below.
GBP / US dollar
Many readers will know that exchange rates can vary for many economic reasons. For some, it may only become apparent when purchasing foreign currency for a holiday or visit abroad. The current indicated exchange rate is $1.35 at the time of writing (23 December 2025), still an elevated rate in recent times.
UK Net Public Sector Gross Domestic Debt v GDP
It is noteworthy that net public sector debt has consistently run for some time at approximately 94%-100% of UK monthly GDP (gross domestic product) (source: Office for National Statistics / ONS). The November 2025 figure has continued in a similar way with the statistics showing the provisional estimate as 95.6% and remains at levels last seen in the early 1960s. Some will not want to see this level (and its associated interest costs) rise.
The ONS notes that GDP growth in the UK to September 2025 for the prior three months was 0.1%, with GDP growth in the prior quarter being stronger (0.3% in the second quarter). Many global trading areas saw their short-term growth forecasts reduced by the OECD (Organisation for Economic Co-operation and Development) in early June for 2025 and 2026 because of the recent tariff / trade wars.
Markets factor in most things
Turning to the recent market position, many individuals may refer to the value of their pension or ISA arrangements as a reference point to how markets are moving. We all know that the value of funds can fall as well as rise, and we have seen some volatility this year, although alongside positive returns from some global equity markets. Volatility is not uncommon, and this can be triggered by global economic events, or their continued effects.
The key point here is that if we think something is happening (such as the ongoing cost-of-living issues and rising tax costs), the markets have usually factored in the effects. Looking at the markets on 23 December 2025, in comparison to a year ago, we find the following (approximate) for a range of market indices:
Market values can fall as well as rise and this is only a snapshot in time. As you can see, and as anticipated, some markets in this snapshot have performed better than others, although this is not a guarantee of future performance.
The tax year 2025/2026 is moving on and there is much to consider
With December 2025 near complete and the tax year now well over halfway through, there is still much to consider in the balance of this tax year.
The Budget announcements have been made, and UK inflation rates have remained elevated, and to some extent stubborn, with bank base rates and borrowing costs remaining higher than some anticipated. This, I am sure, will have a bearing on future fiscal announcements.
There continues to be much political and economic change and jostling globally. Being ready with your overall financial planning and household budgeting is likely to be a far better position than addressing financial issues at hand later.
We hope that you enjoy the festivities ahead and don’t forget to use annual tax allowances where available and appropriate. We look forward to working with you into 2026.
Keith Churchouse FPFS
Director
CFP Chartered FCSI
Chartered Financial Planner
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