Will interest rates fall?

The Bank of England held interest rates at 5.25% again at its latest meeting on 1 February. But can we expect rates to fall when the Bank meets again next month?

Low angle view looking east towards The Royal Exchange and glass and steel office buildings in The City of London England UK
(Image credit: Getty Images)

The Bank of England has frozen the base rate at 5.25% for the fourth consecutive time, raising hopes that the cost of borrowing will drop in the coming months.

The freeze has been driven by lower inflation, with the consumer price index measure at 4% in the 12 months to January, remaining at the same level recorded in December.

While inflation has fallen significantly from the record inflation rate we saw in October 2022, when it hit a 12-year high of 11.1%, the 4% rate is still double the Bank's 2% target and is the highest nominal inflation rate in the G7.

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The Bank also has to consider that wage growth - while slowing - remains above inflation, while UK GDP figures suggest the UK entered a recession at the end of 2023.

So the central bank has a balancing act of avoiding pushing inflation higher by cutting rates too soon and keeping rates high but pushes the economy down further.

Bank of England governor Andrew Bailey told a House of Lords economic committee meeting in mid-February that Threadneedle Street is monitoring how far pay growth figures will slide before taking action on rate cuts.

We look at the outlook for interest rates, whether they have peaked, when they may be lowered, and what changes to interest rates mean for your finances.

What does inflation mean for interest rates?

The BoE hiked the base rate for over a year and a half as it tried to battle inflation. This led to increased mortgage rates and prompted concerns of a recession

While CPI remains above the Bank's 2% target, inflation has been on a downward trend in recent months (bar the slight uptick in the December figures), suggesting monetary tightening is working. 

Analysts expect inflation to fall rapidly this year. The Oxford Economics consultancy and Investec and Deutsche Bank predict that CPI will drop below 2% within four months.

ING Group expects the rate to plunge to 1.5% in May.

The latest MPC report said inflation and wage growth suggest the BoE's current stance is "restrictive," removing some of the pressure to raise rates further.

MPC members voted by 6-3 to hold rates at the February meeting, with two people voting to raise the cost of borrowing to 5.5% and one backing a cut to 5%.

WHEN WILL INTEREST RATES FALL?

The consensus seems to be that, bar any economic shocks, we are now at the peak of the interest rate cycle, and we're unlikely to see rates move higher.

Traders now expect around four interest rate cuts in 2024, with the first coming in May or June.

Indeed, major mortgage lenders have been cutting their rates over the past few months in anticipation of this.

But there are warnings that recent economic data including the January inflation freeze and the UK entering a technical recession in 2023 could push back rate cuts.

Matthew Ryan, head of market strategy at global financial services firm Ebury, highlights that the pound has sold-off against its peers off the back of poor UK GDP figures.

"Clearly, investors are not convinced that a mild recession will be enough to encourage the MPC to pull the trigger on lower interest rates just yet, as policymakers are far more focused on bringing down UK inflation than propping up near-term growth - we continue to see the first BoE rate cut no sooner than the bank's June meeting," he says.

Ed Monk, associate director at Fidelity International,s ays falling growth means demand is ebbing out of the economy.

But while that puts downward pressure on inflation, he warns there’s little sign the Bank of England will cut rates yet. 

"Inflation remains twice its official target level and wages are still rising strongly," says Monk.

"That’s good for households in the short term but may mean we’re living with interest rates at these levels for many more months."

The consultancy Capital Economics previously predicted that interest rates wouldn't be cut until late 2024, but earlier this month revised its forecast. 

Ruth Gregory, deputy chief UK economist, says: "Inflation in February, March and April will be pushed down; the rate will also be dragged down by what is shaping up to be a fall in the Ofgem price cap of 10% or more. 

"As a result, we think inflation will be below the 2% target by April. That would take it below the rates in the US and the eurozone for the first time in two years. And it may mean the Bank of England will be in a position to start cutting interest rates in June."

The consultancy expects rates to fall to 3% in 2025, rather than to 3.50-3.75% as priced into the market.

Across the pond, the Federal Reserve also kept interest rates unchanged at its most recent meeting and suggested a discussion on cuts is “coming into view”.

While it's widely expected the Fed will cut its rates this year - and often the UK follows the US in monetary decisions - one potential issue is Donald Trump. 

The former president won by a landslide in the first contest in the Republican race for a presidential nominee (in Iowa), and he is likely to attack the Fed for cutting interest rates. How the Fed responds is anyone's guess.

When is the next interest rate review?

The MPC meets eight times a year to discuss whether it should raise or cut interest rates, or keep them the same.

It last met on 1 February 2024, when it decided to maintain interest rates at 5.25%. 

The next interest rate meeting will take place on 21 March 2024.

For all the 2024 dates, check out our Key dates for 2024 article. 

What will an interest rate fall mean for my mortgage?

Homeowners have been forced to take on big increases in monthly mortgage costs as their fixed deals end. Around 1.6 million mortgage deals are due to end in 2024, meaning customers will likely have to remortgage onto much higher rates. 

Mortgage rates remain high, due to the turmoil following the disastrous mini-Budget, which led to 14 consecutive base rate increases. 

While lenders have been trimming rates over the past few months, we can not be sure that we will see more cuts for a while.

Kellie Steed, Uswitch.com mortgage expert, said: “Due to expectations of cuts later in 2024, many mortgage lenders had already begun reducing their rates ahead of today's announcement. Both big six lenders, such as Halifax and HSBC and a number of building societies have reduced their fixed-rate deals multiple times throughout January. Some now have selected products available at around 4%, and even slightly below that in certain circumstances.

“However, it remains to be seen whether there will be further cuts to mortgage rates in the coming days as a result of today's decision. Some economists are predicting that the base rate won't fall until May or June, however, London Stock Exchange Group data shows that the base rate is largely expected to fall an entire percentage point, down to 4.25%, by the end of 2024."

What will it mean for my savings?

Savings rates have been rising rapidly, but are now starting to plateau, and in some cases, fall. Many of the best savings rates are already disappearing from the market.

"The best one-year fixed-rate savings deal has now dropped below the best variable one, as banks price in the rate cuts they’re expecting," notes Sarah Coles, head of personal finance at Hargreaves Lansdown.

"If you don’t need the cash for a year or more, you may be tempted to hold it in a variable-rate account for a higher return in the short term. However, in the coming months, there’s a very high chance that rates will fall, so if you don’t need the cash right now, fixing and guaranteeing the return for a year or more may well prove more rewarding."

Check out our round-up of the best easy-access rates, one-year savings accounts, regular saver accounts and cash ISAs.

Shopping around for the best rate is vital: don’t assume your provider has been raising your rate every time the Bank of England has hiked rates. You’ll need to proactively look for a top savings rate and switch your account to take advantage. If your savings account is not on sale to new customers anymore, you could be earning less than 1% interest.

Ruth Emery

Ruth is passionate about helping people feel more confident about their finances. She was previously editor of Times Money Mentor, and prior to that was deputy Money editor at The Sunday Times. 

A multi-award winning journalist, Ruth started her career on a pensions magazine at the FT Group, and has also worked at Money Observer and Money Advice Service. 

Outside of work, she is a mum to two young children, a magistrate and an NHS volunteer.

With contributions from