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

Interest rates are on a downward path, but next week’s Monetary Policy Committee (MPC) meeting looks too early for another cut from the Bank of England. Although the labour market is showing signs of weakening, with wage growth slowing and the unemployment rate picking up, inflation still looks strong at 3.5% (April report).

The Office for National Statistics (ONS) recently published a statement saying April's inflation reading would have been 3.4% rather than 3.5%, were it not for a data blunder from the Department for Transport involving road tax. The figure was not revised, in line with ONS policy. Despite this, a significant slowdown is not expected when May’s report is published on 18 June, the day before the next interest rate announcement.

Research firm Pantheon Macroeconomics thinks inflation will come in at 3.4% in May, with lower airfares and the correction to road tax being offset by strong food and clothes prices. This would bring it in line with the Bank of England’s forecast. Pantheon thinks services inflation will “slightly exceed” the Bank’s expectations.

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The MPC has been clear that it intends to stick to a “gradual and careful approach” with interest rates, which many have taken to mean quarterly cuts. The last base rate reduction took place in May. Speaking to MPs earlier this month, the Bank’s governor Andrew Bailey added 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. Bailey refused to make a prediction on the outcome of the upcoming rates meeting, but experts think a cut looks unlikely.

How many further interest rate cuts this year?

Economists are divided when it comes to the path of interest rates later this year.

Pantheon Macroeconomics argues that the quarterly pace of cuts seen so far has been too fast. “We think a pause is coming,” said Robert Wood, the firm’s chief UK economist. He expects the MPC to cut just once more this year in November. Wood argues that the tariff shock is fading, and that inflation and growth are too high and too strong for the MPC to continue at its current pace.

The economists at Deutsche Bank disagree. They expect rate cuts in August, November and December, bringing the base rate to 3.5%. Pay data could allow the MPC to speed up the pace of rate cuts in the final quarter of the year, in their view.

ING thinks the MPC will continue with quarterly rate cuts, meaning two more reductions this year. That said, its economists haven’t fully ruled out a faster pace, particularly if services inflation falls faster than the MPC’s forecast.

The labour market is cooling

Although metrics like wage growth remain high, the labour market is showing signs of cooling. This could bring inflation down and boost the case for rate cuts later in the year to support growth.

Wages grew 5.2% annually between February and April, down from 5.6% in the previous labour market report. The unemployment rate also increased to 4.6%, the highest level in almost four years, while the number of job vacancies dropped 63,000 over the quarter. ONS survey data suggests some firms are not recruiting new workers or replacing those who have left.

While wages need to come down further for inflation to return sustainably to the 2% target, the trend seems to be in motion. The Bank of England thinks private sector regular pay growth will fall to around 3.75% by the end of 2025.

Despite this, the MPC is still fairly divided, as the latest voting patterns show. The labour market seems to be a bone of contention. Both Huw Pill and Catherine Mann voted to hold rates at 4.5% last month on account of labour market strength.

Pill, the Bank’s chief economist, is concerned that events of the past few years have created lasting cultural change. Bigger pay rises may have become engrained, in his view, with workers continuing to expect them even as resource pressures and the labour market ease.

What do falling interest rates mean for mortgages?

A drop in interest rates generally translates into cheaper mortgages. The average two-year deal is currently 5.13%, while the average five-year deal is 5.10% (10 June).

This is 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.

It will offer little comfort to those coming off a relatively cheap five-year deal agreed before rates started rising in 2021, though. Their monthly repayments are likely to jump when they refinance.

Despite being influenced by the base rate, mortgage rates are priced based on swap rates, which can move up or down based on other factors like gilt yields and inflation. Lenders also look at the competitor landscape and borrower demand.

“While the Bank of England base rate cut last month could be celebrated by borrowers, lenders can move rates in the opposite direction if swap rates rise,” said Rachel Springall, finance expert at Moneyfacts. “This can also cause opposing rate moves on longer-term fixed mortgages versus short-term, depending on the divergence of swap rates.”

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?

The top savings deals have disappeared over the past 18 months, first in anticipation of base rate cuts and then in response to them. Savings rates are likely to fall further over the coming months.

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 for longer. The top one-year fixed account with no minimum deposit requirement currently offers 4.38%, according to Moneyfacts. You can earn 4.27% 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.