Expectations for interest rate cuts have ramped up over the past week after inflation dropped beneath the Bank of England’s 2% target for the first time in over three years. The latest Consumer Prices Index (CPI) report, released on 16 October, showed that UK inflation slowed to 1.7% on an annual basis in September.
The scale of the drop was larger than many analysts had predicted. Morningstar had forecast a rate of 2.1%, based on Factset consensus estimates. Meanwhile, both Capital Economics and ING thought inflation would come in at 1.9%, and Deutsche Bank had predicted a rate of 1.8%.
Services inflation also made meaningful progress in September, slowing from 5.6% to 4.9% (well below the Bank of England's 5.5% prediction). The Bank has been watching this figure closely, as the services sector accounts for around 80% of UK economic output. Services inflation has been particularly sticky in previous reports, suggesting ongoing domestic inflationary pressures.
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Despite this, expectations for rate cuts had already been amping up even before the September CPI report was released. This came after Andrew Bailey, the governor of the Bank of England, gave an interview to The Guardian where he said UK policymakers could become a “bit more aggressive” in their approach to rate cuts if inflation continued to cool.
Speaking again at a meeting of the Institute of International Finance on 23 October, Bailey said that "disinflation" had actually taken place "faster than we expected it to”, but added that the economy still needs to see a further drop in services inflation, despite recent progress.
With this in mind, markets are expecting a 0.25% rate cut at the next Monetary Policy Committee (MPC) meeting in November, taking the base rate down to 4.75%. Some investors and economists then expect another cut to follow shortly afterwards in December.
Despite this, it is important to remember that we still have the Budget to get through before the MPC’s next meeting. Furthermore, inflation is expected to pick up again from next month’s report (due on 20 November) after the energy price cap surged by 10% on 1 October.
“When measured against a fall a year earlier, [energy price rises are] going to look particularly grim,” says Sarah Coles, head of personal finance at Hargreaves Lansdown. “Petrol prices are likely to add insult to injury. They’ll be back on an upwards trajectory thanks to conflict in the Middle East and rising oil prices.”
Against this backdrop, we examine some of the key variables at play. How many meetings does the Bank of England have left in 2024, how far will interest rates fall this year and beyond, and what does it mean for savers, mortgage rates and house prices?
Will interest rates continue to fall this year?
At the moment, most experts agree that we will see at least one more rate cut before the year is out, despite the fact that the MPC was clear-cut in its decision to hold rates at 5% in September, voting by an 8-1 majority.
Ruth Gregory, deputy chief UK economist at Capital Economics, told MoneyWeek: “A 25 basis point cut in interest rates from 5.00% now to 4.75% at November's policy meeting looks nailed on. And the surprisingly large drop in CPI inflation in September has increased the chances that the Bank reduces rates by 25 basis points at the December policy meeting too.
“But a lot of the unexpected weakness in CPI inflation in September was due to a very sharp fall in airfares, which the Bank is unlikely to consider a sign that domestic inflation is becoming less persistent.”
Against this backdrop, Gregory thinks the Bank will keep rates on hold at 4.75% in December, unless October’s CPI brings more good news or the economy looks like it is in trouble.
If the Bank instead opts for two quarter-point cuts, we could end the year with interest rates at 4.5%.
Where will interest rates settle longer term?
Interest rates are expected to continue to fall for much of 2025, although experts warn that they are unlikely to return to the ultra-low levels we experienced for over a decade after the Global Financial Crisis.
James Smith, developed markets economist at ING, tells MoneyWeek: “My view is that we’ll get back-to-back 25bp rate cuts from November through to next August, which takes Bank Rate down to 3.25% where it settles.”
He believes that September’s “surprisingly large dip in services inflation” coupled with “further signs of cooling in the UK’s jobs market” means the Bank of England can speed up the pace of interest rate cuts over the months to come. But he agrees with the consensus view that rates will settle at a higher level than we have become used to in recent history, “barring a serious recession”.
This is partly because inflation is also likely to stay “higher than we were used to 5-10 years ago, owing to the long-term impact of demographics, decarbonisation and deglobalisation, amongst other things,” Smith explains.
Will politics influence the MPC’s decision-making in the near term?
Nearer term, the Budget is a hurdle that policymakers will have to navigate before the end of the year. Chancellor Rachel Reeves’s fiscal statement on 30 October is expected to announce a string of new policies on taxation and spending.
While the worlds of politics and economic policy are meant to be kept entirely separate, the Bank of England will be watching closely to understand if and how the measures announced by Reeves impact the economic data.
The prime minister has already warned that the Budget will be “painful”, fuelling speculation that several taxes will go up.
Another point of discussion has been the pay rises announced by Reeves in July, when she delivered her spending audit. As part of this, she committed to a pay rise for public sector workers, including a 5.5% rise for school teachers and a 22% rise for junior doctors.
Critics have suggested this could keep UK wage growth (and by extension inflation) higher for longer, however Bailey dispelled some of these fears when he spoke at the MPC’s August press conference.
Any impact on inflation would be incremental, Bailey suggested, only getting into “quite small second decimal place numbers”. He cautioned that this was based on “back of the envelope” calculations, but that the MPC would get a fuller picture by 30 October when the Budget is delivered.
How do interest rates control inflation?
Interest rates are the main tool the Bank of England uses to control inflation. In theory, when the MPC increases interest rates, it reduces the flow of money around the economy. Meanwhile, when it cuts rates, households have more money left over in their pocket to spend.
This works because higher interest rates make it more expensive for households to pay their mortgages and service any debts, which means they have less disposable income left over after paying for the essentials. When spending slows, prices rise more slowly too. Sometimes, they even start to plateau or fall if demand drops sufficiently.
It’s not just consumers that are impacted, though. Higher interest rates can also slow economic growth. They make it more expensive for businesses to borrow money, which ultimately hits their bottom line.
If interest rates are kept high for long enough, the risk is that the economy slips into recession, which invariably results in an increase in the unemployment rate as businesses are forced to make cutbacks.
When setting interest rates, policymakers have to walk the tightrope between controlling inflation and maintaining growth. So far, UK economic growth has proved fairly resilient. The UK dipped into a brief and shallow recession at the end of 2023, but quickly emerged. The latest UK GDP figures show the economy grew by 0.2% in August.
What do falling interest rates mean for mortgages and house prices?
Mortgage rates have fallen significantly from their peak last summer, but remain higher today than they have been for much of the past decade.
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 they have fallen to 5.41% and 5.10% respectively.
Although the average two and five-year fixed rates are still above 5%, some borrowers will be able to secure a sub-4% deal by shopping around. It is worth doing your research as finding a competitive deal could save you thousands of pounds.
Despite the fall in rates in recent months, there is still a fair amount of volatility in the market and experts have warned that mortgage rates could start to edge back up again over the weeks to come.
“Fixed-rate pricing depends on what the market anticipates may happen to interest rates and uncertainty over the forthcoming Budget, mixed messages from the Bank of England and global unrest is pushing costs back up for lenders,” says David Hollingworth, associate director at L&C Mortgages.
Despite this, interest rate cuts in November, December or beyond should hopefully set mortgage rates back on a downward trajectory, even if the halcyon days of 1% or 2% mortgage rates are unlikely to return any time soon.
There could be good news for homeowners looking to sell, though. The housing market has been dampened by higher mortgage rates since prices peaked in the summer of 2022, but the recent fall in mortgage rates could bring more buyers to the market.
House prices typically rise when interest rates are cut, as affordability constraints loosen and buyer demand picks up. This is something to keep an eye on if you are thinking about the best time to sell your house.
What do falling interest rates mean for savings?
Several providers have pulled their top savings deals over the past few months, after the MPC announced its first rate cut on 1 August. Savings rates have tumbled further still in recent weeks as bets on a November cut ramp up.
Some of the most competitive accounts still pay rates of around 5%, but savers will need to act quickly to take advantage of the current offering.
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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