Laura Miller
Interest rates may be more likely to come down when the Bank of England (BoE) sets rates in November after inflation came in lower than expected.
Goldman Sachs has said it expects the BoE to cut rates by 25 basis points from 4% to 3.75% next week.
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Goldman said any decision by the Monetary Policy Committee (MPC) to lower interest rates would be close though, “as there are still also arguments to look for a hold”.
While inflation has remained at 3.8%, it is still almost double the BoE’s 2% target, while the MPC’s commentary since it held rates in September has remained cautious.
Although inflation is expected to gradually slow after September, MPC forecasts don’t show it returning to the 2% target until the second quarter of 2027.
While Goldman Sachs predicts a base rate cut next week, Deutsche Bank has predicted a hold, although its call is now “finely balanced”.
“The case for a quarter-point rate cut has strengthened materially on the back of a dovish round of data,” said Sanjay Raja, the bank’s chief UK economist.
A tough tightrope for the Bank of England
The Bank of England has a tough tightrope to walk when deciding the timing and extent of future rate cuts. It needs to support growth while simultaneously bringing inflation under control. Cutting rates could boost the economy, but it could also allow inflation to rise further.
Increasingly, there are signs that the MPC is divided on how to balance these objectives. At August’s meeting, two votes were required before the narrow 5-4 majority could be reached.
Sanjay Raja, Deutsche Bank’s chief UK economist, highlights three key factions within the MPC – hawks, centrists and doves.
Hawks think there have been structural changes in the labour market, which will lead to stickier inflation going forward. Centrists are worried about the economic outlook and weakening demand. Doves think inflation is normalising.
We are likely to see continued division over the coming meetings. MPC members Swati Dhingra and Alan Taylor have been persistent in pushing for a faster pace of rate cuts, but were outvoted in September’s meeting by a 7-2 majority.
While economic pressures are visible, growth has proved more resilient than many expected so far this year, which could give the MPC some flexibility if it decides to slow the pace of cuts from its previous pattern of once per quarter.
GDP grew by 0.7% in the first quarter of 2025 and 0.3% in the second and rose 0.1% month-on-month in August, following a fall of 0.1% in July, in line with expectations. However services showed no growth month-on-month and construction output fell by 0.3% month-on-month. Production output grew by 0.4%.
What do falling interest rates mean for mortgages?
A drop in interest rates generally translates into cheaper mortgages. The average two-year fixed-rate mortgage deal is currently 4.96%, while the average five-year deal is 5.02% (as of 29 October), according to Moneyfacts.
This is slightly higher than a month ago but significantly cheaper than this time two years ago. At its peak in August 2023, the average two-year rate was 6.85% and the average five-year rate was 6.37%, according to Moneyfacts.
This is good news for those coming to the end of a two-year fix. A drop in average mortgage rates from 6.85% to 4.96% roughly equates to a £459 drop in monthly repayments for someone with £400,000 of borrowing. These calculations assume a total mortgage term of 25 years, and are based on figures we plugged into MoneyHelper’s mortgage calculator.
Things don’t look so good for those coming to the end of a relatively cheap five-year deal agreed before rates started rising in 2021. Their monthly repayments are likely to jump when they refinance.
Around 1.6 million fixed-rate deals are due to come to an end in 2025, according to trade association UK Finance.
What do falling interest rates mean for savings?
Some of the top savings deals have disappeared over the past 18 months, first in anticipation of base rate cuts and then in response to them. A combination of rate cuts and rising inflation means savers are being squeezed on both sides when looking for savings accounts that beat inflation.
The Moneyfacts Average Savings rate fell from 3.46% in September to 3.44% in October, and it is now at its lowest level in more than two years and below current inflation forecasts of 4%.
Dig deeper into the different types of account on offer – easy access, notice and fixed savings accounts and cash ISAs – all are now paying less than 4% on average. In fact, only around one in four accounts pays better than 4%, which is also the current level of the Bank of England Base Rate.
“It means money left sitting in low-paying accounts is losing value in real terms. It is essential that savers take the initiative and shop around to secure the best return on their hard-earned savings,” said Adam French, head of news at Moneyfacts.
If you are happy to lock up your cash for a year or so, it could make sense to fix your savings to lock in higher rates. The leading one-year fixed rate is currently with LHV Bank, which is offering 4.46% AER interest. Savers can open an account with a minimum deposit of £1,000.
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.
Those with a longer horizon ahead of them could consider investing some of their savings. A diversified portfolio of investments typically outperforms cash over the long run, but a minimum horizon of five years is generally recommended. We take a closer look in our guide on saving versus investing.
What do falling interest rates mean for annuities?
Annuities are a way of turning your pension pot into a guaranteed income for life. You buy an annuity by using some or all of your pension savings.
How much income you get in exchange for your pot depends on annuity rates. These are linked to UK government bond yields, which are in turn linked to the Bank of England base rate. A cut in interest rates generally translates into a fall in annuity rates.
As interest rates rose from 2022, the annuity market experienced a period of unprecedented strength. At the moment, annuity incomes are hovering near all-time highs.
Helen Morrissey, head of retirement analysis at Hargreaves Lansdown, described September’s decision to hold interest rates at 4% as “good news for those on the hunt for an annuity”. A slower pace of cuts going forward could help to keep rates high.
Recent data from Hargreaves Lansdown’s annuity search engine shows a 65-year-old with a £100,000 pension can get up to £7,793 per year from a single-life level annuity with a five-year guarantee.
These incomes have led to a revival in a market that was once very much relegated to the sidelines, with last year proving a bumper year for sales.
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