Back-to-back interest rate cuts in May and June look unlikely, according to most economists, after the Bank of England sounded a more cautious tone than expected at its latest meeting on 8 May.
The Monetary Policy Committee (MPC) voted to reduce rates by 25 basis points, bringing the base rate to 4.25%, but reiterated its commitment to a steady approach to further cuts going forward.
Several weeks before the meeting, investors began pricing in a faster pace of rate cuts after Donald Trump unveiled a string of aggressive tariffs on “Liberation Day”. They have scaled back their bets somewhat in the aftermath of May’s base rate meeting.
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Most economists are now expecting two further rate cuts from the Bank of England before the end of the year, continuing the quarterly cadence we have seen so far.
“Investors were primed for signals that the committee was preparing to pivot, and ahead of the meeting, two further cuts were priced at the next three meetings. That would mark a deviation from the once-per-quarter rhythm of rate cuts the BoE has so far employed,” said James Smith, developed markets economist at financial institution ING.
“Instead, the Bank stuck to its previous script, simply reiterating that future cuts are likely to be ‘gradual and careful’. Changing that language would have heavily implied the Bank was prepared to cut rates again in June, something we suspect it’s reluctant to do – or at least pre-commit to – at this stage.”
Is a “temporary” rise in inflation coming?
After slowing to 2.6% in March, the rate of inflation is expected to rise to around 3.5% over the coming months, largely driven by previous increases in energy prices and other regulated bills like water. However, the Bank expects this increase to be “temporary”.
“These price increases are not directly linked to the underlying cost pressures in the UK economy… Meanwhile, other services prices – those that are more closely linked to activity and cost pressures – are on course to pull down on inflation in the coming months,” said the Bank’s governor Andrew Bailey.
The Bank also said Trump’s tariffs were “more likely to be disinflationary than inflationary” in the UK, with trade restrictions acting as a drag on economic activity. However, a significant degree of uncertainty remains – both in terms of trade and other variables.
The Bank has plotted a range of scenarios and is “alert to a range of risks in both directions,” Bailey said.
“We need to watch very carefully for any signs that the near-term increase in inflation could lead to additional second-round effects on wage and price-setting, even if that is not our central assumption, but also for any further weakening in demand which would reduce inflationary pressure,” he added.
For now, we are seeing signs of cooling in the labour market. The latest report published on 13 May showed annual wage growth slowed to 5.6% between January and March, versus the previous three-month period. This is lower than the 5.9% reading in the previous report.
The unemployment rate picked up to 4.5% over the same period, up from 4.4% previously.
Although both metrics are watched closely by the Bank of England, it is too early for this data to prompt the MPC to change its stance and start cutting rates more rapidly.
How many interest rate cuts can we expect in 2025?
Most economists expect two more rate cuts from the Bank of England before the end of 2025. Research provider Pantheon Macroeconomics is one such example. It expects the first of the two cuts to come in August and the second in November.
ING is also forecasting two more cuts, coming at a quarterly cadence. However, it hasn’t completely ruled out the Bank of England “moving faster at some point”.
ING points out that there is “major uncertainty” surrounding April’s services inflation figure, which will be published on 21 May. Its economists think this could have been a key factor keeping the MPC cautious during its May meeting.
Deutsche Bank is bolder in its outlook, and is forecasting three cuts before the end of the year.
“While the vote tally didn't lean dovishly [in May], the MPC's forecasts did – suggesting more of a downside skew than upside,” said the bank’s chief UK economist Sanjay Raja.
“Growth forecasts were cut for 2026. The Bank's unemployment rate projections were raised and are now expected to peak at 5%. Private sector wage growth is expected to slow more than previously anticipated. And inflation is projected to be lower in every year of the MPC's forecast horizon,” he added.
While the Bank of England had previously forecast that inflation would peak at 3.75% in the third quarter of this year, it now expects it to peak at 3.5%.
What do falling interest rates mean for mortgages?
Further interest rate cuts could mean cheaper mortgages.
Mortgage rates have already fallen significantly in recent months, with the average two-year fixed rate dropping to the lowest point recorded since the disastrous mini-Budget in September 2022. Rachel Springall, finance expert at Moneyfacts calls this “a notable milestone”.
“Falling swap rates have been the driving force behind fixed-rate mortgage cuts,” Springall explains. The drops in recent months have partly been driven by Trump’s tariffs, after investors began pricing a faster pace of rate cuts into markets as growth fears ramped up.
It will offer 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.
- Current rates: As of 13 May, average rates have fallen to 5.13% and 5.09%.
- Pre-pandemic rates: In 2019, both the two and five-year rates were below 3%.
Whatever happens with interest rates, it is worth shopping around a few months before your current deal expires to lock in the best market rates as they appear. If a better rate appears in the meantime, you can usually change it right up until the start date.
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 account with no minimum deposit requirement currently offers 4.31%. You can earn 4.22% in an equivalent 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.
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