Summary
- Markets and economists have all but ruled out a June interest rate cut, meaning rates are likely to remain at 4.25% tomorrow.
- Inflation remains high, with the headline figure coming in at 3.4% in May.
- The conflict between Israel and Iran has also pushed oil prices up in recent days, which could put upward pressure on energy prices and inflation going forward.
- While the labour market has shown signs of cooling in recent months, it is likely that the Bank will want to see further progress before increasing the pace of cuts.
- Research provider Pantheon Macroeconomics has forecast a 7-2 voting split within the Monetary Policy Committee (MPC) tomorrow, with just Swati Dhingra and Alan Taylor, both external members, voting for a cut.
- The MPC is likely to reiterate its “gradual and careful” message going forward, which some have interpreted as meaning quarterly rate cuts. However, the Bank has been clear that it assesses the economy on a meeting-by-meeting basis.
- The last time the Bank cut rates was in May, continuing the easing cycle that began last summer.
| When will interest rates fall further? | Inflation latest | MPC meeting dates |
Across the pond: will the Fed cut US rates today?
The US Federal Reserve (Fed) is also meeting to discuss interest rates this week. It will announce its decision at 2pm ET today, which is 7pm UK time. The Fed is widely expected to hold rates at their current range of 4.25-4.5%.
Research provider Pantheon Macroeconomics agrees that the Fed will play for time.
“The economy is slowing gradually for now, so policymakers will conclude they can wait for more information on the size, speed and breadth of the uplift to consumer prices from the current tariffs, as well on whether extra tariffs will be imposed this summer,” said Samuel Tombs, Pantheon’s chief US economist.
A hold decision will prove unpopular with US president Donald Trump, who has repeatedly criticised Fed chairman Jerome Powell. Trump believes rates are being cut too slowly. In the lead-up to the presidential election, he promised to relieve pressure on US households by reducing borrowing costs – a decision that lies outside of the president’s power.
What about prospective homeowners shopping for a mortgage?
Prospective homeowners and those looking to remortgage may be disappointed to hear rates are likely to remain on hold tomorrow. However, it is worth pointing out that fixed-rate mortgage deals are priced based on a range of factors, including swap rates. This means they don’t always move in tandem with the base rate.
David Hollingworth, associate director at L&C Mortgages, said mortgage rates have been hard to call in recent weeks. “After a period of fixed rate increases, there’s now a more mixed [picture] with some lenders cutting deals again slightly, as markets find their level,” he said this morning.
“Overall, it looks as though fixed rates may bobble up and down without any significant trend or shift either way. That said there’s clearly a great deal of uncertainty as global events unfold. Borrowers would be better to focus on getting the best available rates and keeping them under review, rather than second guessing the next move in interest rates.”
Remember: if you have a fixed-rate mortgage and are in the middle of your deal, you won’t see any change in your repayments until the fixed period ends, no matter what happens with interest rates tomorrow. The changes we have highlighted here refer to new deals currently available on the market.
Would an interest rate “hold” be good news for savers?
Unlike those with debts, savers may be pleased to hear interest rates are expected to hold steady tomorrow. Savings rates have fallen over the past year or so, first in anticipation of base rate cuts and then in response to them.
That said, part of the reason the Bank of England is expected to hold interest rates at their current level is that inflation is proving persistent – and inflation is a saver’s worst nightmare. Savers may now be feeling the pinch.
“Savers continue to be hit by the handful of base rate cuts over the past year as all the top rates for non-ISAs have dropped compared to the market leaders in June 2024,” said Caitlyn Eastell, spokesperson at comparison site Moneyfacts. “Those consumers with a variable-rate account or who have only fixed for a year may now be feeling the pressure.”
Make sure you shop around for the best deal when choosing a savings account or cash ISA. See our round-up of the best easy-access rates, one-year savings accounts, regular saver accounts and cash ISAs for the latest deals on cash savings.
What does it all mean for Rachel Reeves?
The Bank of England sets interest rates independently from the government. This means the chancellor, Rachel Reeves, is not allowed to get involved. That won’t stop her from hoping for further rate cuts though – and sooner rather than later.
When interest rates are high, it is more expensive for the government to borrow money. High borrowing costs and weak economic growth erode the chancellor’s fiscal headroom, otherwise known as the amount of leeway Reeves has to increase spending or cut taxes.
As Paul Johnson, director of the Institute for Fiscal Studies (IFS), has pointed out, Reeves’s fiscal rules are currently being met by a “gnat’s whisker”. If gilt yields rise any further or growth expectations weaken, further tax hikes or spending cuts will be necessary.
Although the base rate isn’t expected to rise at any point in the near future, gilt yields (which represent the cost of government borrowing) could go up if markets start pricing in a “higher for longer” inflation scenario and slower base rate cuts.
This could create a headache for Reeves in the lead-up to the 2025 Autumn Budget.
“A smorgasbord of mixed messages”
As well as maintaining price stability, the Bank of England is responsible for supporting growth and employment. This is a tricky tightrope to walk. Bringing inflation under control means keeping interest rates high – but if you do this for too long, households and businesses feel the pinch.
Economists often talk about achieving a “soft landing”. This is when inflation and growth slow without dipping into recession. Timing interest rate cuts perfectly can help achieve this, but it is no easy feat.
Laith Khalaf, head of investment analysis at platform AJ Bell, said the Bank of England currently has “a smorgasbord of mixed messages” to distil. Inflation remains high, tariffs are causing trade disruption, oil prices have spiked as a result of tensions in the Middle East, and growth slumped in April, with GDP dropping 0.3% on a monthly basis.
“Little wonder that at the last meeting of the Monetary Policy Committee (MPC), the committee was split in terms of the direction of monetary policy. Markets are currently pricing in only a 10% chance of a rate cut, with the consensus landing on a rate cut in August or September, and then another one by year end,” he said.
The economy slumped by 0.3% in April, as business tax changes and Donald Trump's tariffs took their toll.
How many further rate cuts this year?
A “hold” decision is widely expected tomorrow, but how many interest rate cuts can we expect later this year? Experts are divided.
- Research provider Pantheon Macroeconomics expects just one more cut this year, potentially coming in August. It previously thought November, but has brought this date forward after the labour market showed signs of weakening in the latest ONS report. This would bring the base rate to 4%.
- Financial institution ING is expecting quarterly cuts, which would mean two more cuts this year. Its economists think they will come in August and November. This would bring the base rate to 3.75%.
- Deutsche Bank thinks we will see three more cuts, coming in August, November and December. Its economists think weaker pay data could allow the MPC to speed up the pace of rate cuts in the final quarter of the year. This would bring the base rate to 3.5%.
Pace of rate cuts “now shrouded in a lot more uncertainty”
Speaking to MPs earlier this month, the Bank of England’s governor Andrew Bailey said that the pace and extent of cuts was “now shrouded in a lot more uncertainty” thanks to global trade disruption.
The Bank is currently of the opinion that Donald Trump’s tariffs will reduce global economic activity, lowering export prices and inflation – but Bailey added that this view is “open to interpretation”. If tariffs disrupt supply chains, for example, that could prove inflationary.
The recent escalation of tensions in the Middle East could add to the economic uncertainty, pushing oil prices (and therefore energy prices and inflation) up.
“While it’s unlikely to result in rate hikes, a sustained and/or permanent increase in oil prices could push inflation expectations higher (albeit temporarily). This could open the door to a slower removal of policy restriction going forward,” said Sanjay Raja, chief UK economist at Deutsche Bank.
Governor of the Bank of England, Andrew Bailey
“Gradual and careful” approach to interest rate cuts
In recent months, the Bank of England has repeatedly said that it plans to take a “gradual and careful” approach to monetary policy easing. Many have interpreted this as meaning a quarterly pace of rate cuts. This is the pattern we have seen so far:
- August 2024: The first cut this cycle brought rates from 5.25% to 5%.
- November 2024: Rates reduced from 5% to 4.75%.
- February 2025: Rates cut to 4.5%
- May 2025: Rates cut to 4.25%.
The Bank of England has been clear that it doesn’t have any set path in mind, and that it assesses the data on a meeting-by-meeting basis when making decisions.
Inflation still coming in hot
The Office for National Statistics (ONS) published May’s inflation report this morning. Prices rose by 3.4% on an annual basis.
This was down from April’s official reading of 3.5%, but this figure was artificially inflated by a car tax blunder from the Department for Transport, meaning it should have been 3.4%. The ONS decided not to revise April’s report, in line with its usual policy.
A reading of 3.4% is still fairly hot. Remember that the Bank of England’s target is 2%.
Inflation briefly returned to target levels last year, before dropping below 2% in September 2024, but higher energy prices have largely been responsible for pushing it back up in the period since.
The Bank of England expects inflation to peak at around 3.7% in September this year before falling back, according to its latest monetary policy report.
Good afternoon and welcome to our live report. The Bank of England will announce its next interest rate decision at midday tomorrow.
Temperatures might be heating up across the UK, but interest rates are likely to be kept on ice. Markets and economists are confident that the Monetary Policy Committee (MPC) will hold rates at 4.25% tomorrow. Stick with us for all the details, including preview analysis today and live reporting tomorrow.
