Interest rates are widely expected to be cut on Thursday (18 December), with some predicting a reduction of 25 basis points.
The markets are currently pricing in an over 90% chance that interest rates will be cut at the next Monetary Policy Committee (MPC) meeting. This expectation is also reflected by leading experts and analysts.
If they are correct, a 25 basis point cut would bring the bank rate to the lowest level in almost three years – interest rates were last below 4% in January 2023.
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A research note from HSBC says it expects the MPC to vote to cut rates by a relatively narrow margin, with five votes to cut and four to hold.
They expect BoE governor Andrew Bailey to be the deciding vote to cut, switching from his position in November, when he broke a tie to hold interest rates.
HSBC’s research note said: “In our view the last thing the sterling rate market needs right now is the BoE adding to a sense of confusion. Governor Bailey will be aware of this. Given he’s not made any public comment that pushes back against market pricing, we fall in line with the market and assume a December cut.”
Deutsche Bank is also among the bodies that expect a rate cut on Thursday, also expecting the MPC to bring the bank rate down to 3.75% with a 5-4 vote split.
Sanjay Raja, chief UK economist at Deutsche Bank, said: “We expect the Bank of England to deliver its final rate cut of the year, taking Bank Rate to a new cyclical low of 3.75% – its sixth rate cut of the cycle.
“Indeed, disinflation progress – for both prices and wages, combined with weaker growth, a disinflationary Budget, and a looser labour market – will likely be sufficient for a further dial down of restrictive policy.”
A strong expectation that interest rates will be cut is also held by Laith Khalaf, head of investment analysis at AJ Bell, who said: “It will be a huge shock to the system if we don’t [see a rate cut].”
He said it is even more likely that a rate cut will be pushed through this month, given how narrowly the MPC voted to hold the bank rate in November.
The economic backdrop
The MPC uses economic data to help inform its decision over whether or not to raise, lower, or hold interest rates.
BoE governor Andrew Bailey said in November that one of the reasons for his decision to hold interest rates was that in December the MPC would have a lot more data to base their decision on, including an additional two months of inflation data and all the details of what was announced in the Autumn Budget.
One of the most important economic metrics used by the MPC is the inflation rate. Inflation fell to 3.6% in October, the latest month for which data is available, following on from a three month plateau at 3.8% between July and September. The inflation data for November will be released on Wednesday 17 December.
Most analysts anticipate that this fall is the first in a prolonged period where inflation will gradually fall closer to the 2% target. The Bank of England shares this view, and will have access to November’s inflation data when they meet to set the bank rate this week.
Alongside cooling inflation, the UK economy is weakening, providing a further downward pressure on inflation.
Unemployment hit its highest level since 2021 in the three months to September, according to the latest figures from the Office for National Statistics (ONS), with wage growth slowing to 4.6% during the same period (down from 4.7% in the three months to August).
That data “should give the MPC more confidence to cut Bank Rate further by year-end,” said Sanjay Raja, chief UK economist at Deutsche Bank. “There’s more slack building in the labour market – and perhaps more so than assumed by the MPC in its November projections.”
Will interest rates fall further in 2026?
Most analysts expect interest rates to be cut on 18 December. This would be good news for many borrowers, though it will force down interest rates on some savings accounts.
But whether a sustained fall in the bank rate will continue into 2026 is more disputed.
Raja at Deutsche Bank notes that the BoE will likely move to “a more data-dependent stance, giving it greater flexibility on the timing of future cuts,” as they pivot away from the quarterly cadence of rate cuts that existed in 2025.
He added: “We stick to our call for two further rate cuts in 2026 – one in March, and another in June, taking Bank Rate to a terminal rate of 3.25% – broadly consistent with our current estimates of [the neutral interest rate].
“We see risks skewed to a slightly slower but deeper easing cycle in 2026. That said, as we recently noted, the conditions for a more rapid easing cycle are emerging – though not our base case.”
HSBC’s estimates for future rate cuts are slightly more optimistic, with the bank pencilling in three cuts of 25 basis points in 2026. They expect these to be in February, April, and July.
The research note added: “We think that policy will be returned to a neutral stance, and that a 3.50-3.75% range is too high for the UK neutral rate given its sluggish productivity growth.”
What do falling interest rates mean for mortgages?
A drop in interest rates generally translates into cheaper mortgages. Mortgage rates are already falling in anticipation of another rate cut.
Moneyfacts UK Mortgage Trends Treasury Report data reveals the average two- and five-year fixed mortgage rates fell month-on-month in December by notable margins, now both at their lowest levels since the start of September 2022, before the ‘mini-Budget’.
Average mortgage rates on two- and five-year fixed deals fell by 0.08% and 0.10% – to 4.86% and 4.91% respectively – between 8 November and 8 December. It is the first time the average five-year fixed rate has dropped below 5% since May 2023.
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.
This is good news for those coming to the end of a two-year fix. A drop in average mortgage rates from 6.07% to 4.99% roughly equates to a £258 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.
However Shaun Sturgess, director at Swansea-based Sturgess Mortgage Solutions, said: "2026 is shaping up to be a far more active year than 2025, with lower mortgage rates powering the property market and boosting sentiment among borrowers."
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 when looking for inflation-beating savings accounts.
The Moneyfacts Average Savings rate fell to 3.39% on 8 December from 3.41% on 7 November, and it is now at its lowest level in more than two years. The average savings rate is also currently below the rate of inflation (3.8%).
Dig deeper into the different types of account on offer, and easy access, notice, fixed savings accounts and cash ISAs are all now paying less than 4% on average. Only around one in four accounts pays better than 4%, which is also the current level of the Bank of England Base Rate, Moneyfacts data shows.
“It means money left sitting in low-paying accounts is losing value in real terms. It is essential that savers take the initiative and shop around to secure the best return on their hard-earned savings,” said Adam French, head of news at Moneyfacts.
If you are happy to lock up your cash for a year or so, it could make sense to fix your savings to get better rates. The best one year fixed rate savings account is, as on 8 December, Investec Bank 1-Year fixed rate saver providing an interest rate of 4.5% AER. It requires a minimum deposit of £5,000 and you can save up to £250,000.
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.
“Those considering an annuity can still take advantage of the current competitive rate environment,” said Nick Flynn, retirement income director at Canada Life UK following the latest MPC meeting.
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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