When will UK interest rates fall further? Latest Bank of England predictions

The Bank of England cut interest rates at its first meeting of the year on 6 February, bringing the base rate from 4.75% to 4.5%.

Most economists are still expecting three more rate cuts before the end of the year, despite the fact that inflation rose to 3% in January and is forecast to hit 3.7% by the third quarter.

“It is very unusual for the Bank of England to be cutting interest rates when inflation is above the 2% target and is expected to rise further,” said Paul Dales, chief UK economist at consultancy Capital Economics.

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In deciding to cut rates, Dales says the Bank has “hung its hat on two key judgements”. Firstly, it is assuming that April’s hike to employers’ National Insurance contributions and the minimum wage won’t push inflation up that much. Secondly, it is assuming that wage growth will continue to slow.

Capital Economics believes the Monetary Policy Committee (MPC) will cut interest rates three more times this year, bringing the base rate to 3.75%. The consultancy believes rates will then fall further to 3.5% by early 2026, below the 4% currently priced into the market.

Investment banks ING and Goldman Sachs have also forecast around one interest rate per quarter over the course of 2025.

Will the Bank of England cut interest rates in March?

A rate cut at the next MPC meeting on 20 March currently looks unlikely, particularly after inflation rose by more than expected in January, hitting 3%. It hasn’t been completely ruled out, though.

Two meetings ago in December, three MPC members signalled that they wanted to increase the pace of rate cuts. In total, there were three votes for a 25 basis-point cut (Swati Dhingra, Dave Ramsden and Alan Taylor) versus six votes for a hold.

At the last meeting in February, Catherine Mann switched her vote from “hold” to “cut”, going even further by voting for a 50 basis-point reduction alongside Dhingra. This could suggest Mann will join Dhingra, Ramsden and Taylor in voting for another cut at the next meeting. If so, it would only take one more person to secure the five votes necessary.

That said, the MPC has been clear that it intends to take a “gradual and careful” approach to the further withdrawal of monetary policy restraints.

It is unclear whether recent geopolitical volatility will reinforce the need for caution or further cuts. Trump’s erratic tariff policies could push inflation higher, but also dampen economic growth. “The risks to the UK economy, and indeed the world economy, are substantial,” governor Andrew Bailey told MPs.

Will rising inflation keep rates higher for longer?

Inflation rose to 3% in January, coming in higher than the 2.8% analysts had predicted.

The higher headline figure was largely driven by a bounce in airfares and higher prices for food and non-alcoholic beverages. The addition of VAT to private school fees also pushed educational costs up.

Inflation is expected to rise further over the course of the year, potentially hitting 3.7% in the third quarter, according to the latest forecast from the Bank of England.

Despite this, the Bank doesn’t appear to be overly concerned. The rise will be driven by higher energy prices globally. Meanwhile, the MPC is more focused on price pressures in the domestic economy.

Speaking at the MPC press conference on 6 February, Bailey said: “While we expect inflation to rise again over the coming months, it is almost entirely due to factors that are not directly linked to underlying cost and price pressures in the economy, and factors that we expect to be temporary.”

What do falling interest rates mean for mortgages?

Mortgage rates have fallen from their peak and some sub-4% deals have now re-entered the market. It will come as little comfort to those coming off a relatively-cheap deal agreed before rates started rising in 2021, though.

• Peak rates: In August 2023, both the average two and five-year fixed rates were above 6% at 6.85% and 6.37% respectively, according to Moneyfacts.
• Today’s rates: As of 7 March, average rates have fallen to 5.37% and 5.21%.
• Pre-pandemic rates: In 2019, both the two and five-year rates were below 3%.

“Borrowing costs remain relatively high when compared to the era of cheap money that preceded the start of the Bank of England’s monetary tightening cycle in December 2021,” said Alice Haine, personal finance analyst at platform Bestinvest.

“The lucky borrowers still holding onto cheap fixed-rate loans – secured before the Bank began hiking interest rates – will now be bracing themselves for an inevitable jump in mortgage repayments when they eventually refinance,” she added.

Haine thinks that “sticky inflation” and “robust wage growth” could complicate the picture for those hoping for another rate cut on 20 March.

What do falling interest rates mean for savings?

Several providers have pulled their top savings deals over the past few months as interest rates have fallen. With this in mind, it could make sense to fix your savings if you are happy to lock your cash up for a year or so.

The top one-year fixed-rate savings account currently offers 4.5%. You can earn 4.45% in an 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.