The International Monetary Fund (IMF) expects the Bank of England to cut interest rates three more times this year – and analysts believe the first one of the trio could come next month.
According to the IMF, UK inflation will be the highest in the world's advanced economies this year at 3.1%. It also predicts that the UK economy will grow less than previously forecast, up 1.1% in 2025 instead of 1.6%, because of the global fallout from trade tariffs from US president Donald Trump.
Economists are expecting an interest rate cut when the Monetary Policy Committee (MPC) next meets on 8 May, taking the base rate from 4.5% to 4.25%.
Subscribe to MoneyWeek
Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE
Sign up to Money Morning
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
As well as concerns about the US tariffs – and how trade disruption could potentially push the UK into recession – there are also domestic worries that could force prompt action from the Bank of England.
Data published last week showed a weakening of the labour market, with job vacancies falling from 816,000 to 781,000 as businesses put the brakes on hiring (three months to February versus three months to March).
UK inflation also slowed to 2.6% in March, coming in below forecasts of 2.7%.
This has created a brief window of opportunity for the MPC to reduce rates before inflation starts rising again. The headline figure is expected to hit 3.6% when April’s inflation data is published next month.
There has been a big shift in market pricing in recent weeks, with investors now expecting the MPC to cut interest rates more quickly. The driving force was Trump’s “Liberation Day” tariffs.
Economists are concerned that tariffs will limit global growth. This could force the Bank of England to lower rates in an effort to support the economy.
Although Trump has now paused the worst of the measures announced on 2 April, growth fears are not going away.
“There has been little change in market expectations for rates in the aftermath of the tariff pause. Traders are still expecting between three and four Bank of England cuts before the end of 2025,” said Sarah Coles, head of personal finance at Hargreaves Lansdown.
“There’s also an 84% chance that the first cut will come in May. This has softened slightly since the temporary reprieve, but not enough to raise any real doubt that a May cut is highly likely.”
Coles told MoneyWeek that although Trump’s “newfound enthusiasm for negotiation” has brought some relief to markets, it “doesn’t change the fact that there are still additional tariffs in place, with the threat of more to come”.
“Central banks across the world are expected to step in to protect any growth they can – by cutting interest rates,” she added.
How many interest rate cuts can we expect in 2025?
Most economists expect at least two more rate cuts from the Bank of England before the end of 2025, while the IMF has boldly predicted there will be three more.
Consultancy Capital Economics thinks rates will be trimmed by 25 basis points in May, followed by a further 25 basis-point cut in November. This would take the base rate to 4% by the end of the year.
Financial institution ING is forecasting quarterly cuts. This would mean three more cuts in 2025 (we already had one in February), bringing the base rate to 3.75%.
Deutsche Bank on the other hand is expecting four, taking the base rate to 3.5%.
The Bank of England has been clear that it will assess things on a meeting-by-meeting basis, taking a “gradual and careful approach”.
Although growth concerns are ramping up, adding to the case for interest rate cuts, inflationary pressures haven’t gone away. Inflation is expected to peak at around 3.75% in the third quarter of 2025.
The IMF expects UK inflation to average 3.1% this year, before slowing to 2.2% by 2026.
A large part of the CPI increase will be driven by higher global energy prices, which matter less to the Bank than domestic price pressures. However, UK wage growth is still considerably higher than the Bank would like at 5.9%.
Pantheon Macroeconomics says “pay growth needs to be rising just 2 to 3% year-over-year, rather than 5%-plus, to deliver inflation sustainably at 2%”.
What do falling interest rates mean for mortgages?
Further interest rate cuts could mean cheaper mortgages. Mortgage rates have fallen from their peak and some sub-4% deals have now re-entered the market.
Swap rates have also been falling since Trump’s “Liberation Day” tariff announcements, helping borrowers further (swap rates underpin mortgage pricing).
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 23 April, average rates have fallen to 5.22% and 5.12%.
- Pre-pandemic rates: In 2019, both the two and five-year rates were below 3%.
“Trump’s tariff announcement might have created havoc in the stock market, but there could be a silver lining for UK mortgage borrowers,” said Laith Khalaf, head of investment analysis at AJ Bell.
“Interest rate expectations are falling as markets price in the potential economic damage from US tariffs, and the likelihood the Bank of England will respond with interest rate cuts.”
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 currently offers 4.65%. You can earn 4.35% 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.
-
Which investments can I hold in a stocks and shares ISA – and which ones are banned?HMRC has a list stating which investments are allowed in ISAs, but sometimes investors, and even ISA providers, get confused by the rules. Here’s what you need to know when picking your investments.
-
Review: Andronis Minois and Andronis Arcadia – two Greek island idyllsTravel Andronis Minois on Paros and Andronis Arcadia on Santorini are two beautiful, authentic hotels on two different islands in Greece
-
Live: Bank of England holds UK interest rates at 4.5%The Bank of England voted to hold UK interest rates at their current level of 4.5% in March, as widely anticipated, after inflation rose to 3% in January
-
Bank of England cuts interest rates to 4.5%: full updates and analysisThe Bank of England voted to reduce the base rate by 25 basis points at the first MPC meeting of the year on 6 February. Full coverage as it happened from the team at MoneyWeek.
-
December interest rates: Bank of England keeps rates on holdThe Bank of England kept interest rates on hold at 4.75% in the final Monetary Policy Committee meeting of 2024. Full analysis from the MoneyWeek team.
-
Bank of England cuts interest rates to 4.75% – MPC meetingReporting from the Monetary Policy Committee November meeting. Full coverage, as it happened, from the team at MoneyWeek.
-
Inflation drops below Bank of England target for first time in over three yearsUK inflation slowed to 1.7% in September, boosting the chance of a more aggressive approach to interest rate cuts from the Bank of England
-
Bank of England holds interest rates at 5%The decision was widely expected, after the Bank of England warned interest rates would have to “remain restrictive for sufficiently long”
-
Keeping up with the Bank of England – how rates and inflation impact your financesIgnorance is not bliss when it comes to your personal finances. Here’s why you should follow what the Bank of England is up to.
-
Bank of England cuts interest rates for first time since 2020The Bank of England voted to end pain for households and businesses today, cutting interest rates for the first time in over four years
