Borrowing costs could fall more slowly going forward, with some analysts predicting no further interest rate cuts this year.
The Bank of England held rates at 4% on 18 September, as widely expected. Inflation has been on the rise for most of this year and is expected to peak at 4% when September’s report is published on 22 October.
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“Underlying disinflation has generally continued, although with greater progress in easing wage pressures than prices,” the MPC said in its September statement.
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.
Advisory firm Oxford Economics believes the chance of another rate cut by the end of the year is “less than 50:50”.
Financial institution ING is still “narrowly favouring” one more cut this year, but describes it as a “low conviction view”.
Is this the end of the rate-cutting cycle?
Financial institution ING disagrees with forecasters who are calling this the end of the rate-cutting cycle.
It thinks wage growth will continue to fall over the remainder of this year, services inflation will move lower from spring 2026, and that the jobs market remains in a precarious position.
Tax rises are widely expected in the Autumn Budget and could also drag on growth and inflation.
“At 4%, Bank Rate is above neutral, and we think there are two to three further cuts to come,” said James Smith, ING’s UK economist. It is still possible that one of these will come this year.
“November looks fairly 50:50 to us right now and the data will decide one way or the other,” Smith said.
Deutsche Bank is also expecting three more rate cuts before the end of the cycle, with the first of these coming in December. It thinks rates will settle at 3.25% before next summer, but acknowledged there were “upside risks” to this forecast.
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 and 0.3% in the second. The MPC has increased its forecast for the third quarter from 0.3% to 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 4.98%, while the average five-year deal is 5.02% (18 September).
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 financial information site 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 4.98% equates to a £455 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.
Fewer than half of all available savings accounts now beat inflation, according to data published by Moneyfacts in mid-August. Its report showed that 956 accounts were left offering a real return, down from 1,558 a year ago.
“After almost a year and a half of savings growth, many savers are slipping back into earning negative real returns,” said Caitlyn Eastell, a Moneyfacts spokesperson.
“With inflation running higher than the interest some savings are now earning, money left languishing in a low-interest account is losing its spending power – making it tougher to achieve a sense of financial resilience.”
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 top one-year fixed account with no minimum deposit requirement currently offers 4.45%. You can earn 4.16% 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.
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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