When will UK interest rates fall further? Latest Bank of England predictions

The Bank of England held the base rate at 4.5% in March against a backdrop of rising inflation, persistent wage growth, and an escalating global tariff war. Despite this, markets and economists are forecasting further interest rate cuts before the end of the year.

Rates have already been cut three times from their recent peak of 5.25% – first in August last year, then in November, and more recently in February. Financial markets are pricing in around two more cuts before the end of 2025. Most economists expect three.

Despite this, the Bank of England’s Monetary Policy Committee (MPC) appears to be growing more hawkish. Inflation slowed to 2.8% in February, but the Bank has forecast that it will hit 3.75% later this year.

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“On paper, this shouldn’t be a concern, given that it overwhelmingly reflects rising utility bills. But it’s clear the Bank is still scarred by the experience of two-to-three years ago, where rising natural gas prices fed through to higher service-sector inflation much more aggressively than it had first thought,” writes James Smith, developed markets economist at financial institution ING.

The MPC voted to hold rates by an 8-1 majority in March – a more decisive vote than the 7-2 split most commentators were expecting. It also reiterated its commitment to a “gradual and careful” approach to further cuts, and added that there was “no presumption that monetary policy was on a pre-set path over the next few meetings”.

In other words, the quarterly rate cuts that some experts have predicted are not a done deal.

“If you had to draw one headline out of the latest Bank of England decision to keep rates unchanged at 4.5%, it would be that Catherine Mann has dropped her short-lived call for faster rate cuts,” Smith added.

“Since Mann aired her concerns about the jobs market back in February, the data has been remarkably resilient. Employment and redundancy levels haven’t budged despite repeated surveys showing hiring appetite has fallen ahead of next month’s tax hikes.”

Having never voted for a rate cut before, Mann surprised markets in February by calling for a 50 basis-point reduction. She voted to hold rates in March.

Will interest rates fall further in 2025?

Although the Bank of England seems to be growing more hawkish, economists still think the next base rate cut could come as early as May. A drop in the rate of inflation in February (from 3% to 2.8%) could help build the case, even if it is expected to be short-lived.

“It is very unusual for the Bank of England to be cutting interest rates when inflation is above the 2% target and is expected to rise further,” said Paul Dales, chief UK economist at consultancy Capital Economics. The Bank has “hung its hat on two key judgements”, he explains. Firstly, it is assuming that April’s hike to employers’ National Insurance contributions and the minimum wage won’t push inflation up that much. Secondly, it is assuming that wage growth will continue to slow.

Speaking in February, governor of the Bank of England Andrew Bailey added: “While we expect inflation to rise again over the coming months, it is almost entirely due to factors that are not directly linked to underlying cost and price pressures in the economy, and factors that we expect to be temporary.”

Despite this, risks to the outlook still remain.

In recent months, the Bank has shifted its analysis to place “greater weight” on scenarios in which both inflation and interest rates fall more slowly, according to Capital Economics. “What happens beyond March depends on a whole host of factors, but will largely boil down to how far inflation rises, if that prompts any second-round effects, and the weakness of the economy,” Dales said.

For now, Capital Economics still thinks the Bank will cut rates three more times this year and once in 2026, partly driven by a significant fall in wage growth.

What do falling interest rates mean for mortgages?

Mortgage rates have fallen from their peak and some sub-4% deals have now re-entered the market. 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 26 March, average rates have fallen to 5.32% and 5.18%.
• Pre-pandemic rates: In 2019, both the two and five-year rates were below 3%.

“Borrowing costs remain relatively high when compared to the era of cheap money that preceded the start of the Bank of England’s monetary tightening cycle in December 2021,” said Alice Haine, personal finance analyst at platform Bestinvest.

“The lucky borrowers still holding onto cheap fixed-rate loans – secured before the Bank began hiking interest rates – will now be bracing themselves for an inevitable jump in mortgage repayments when they eventually refinance,” she added.

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 with no minimum deposit currently offers 4.5%. You can also earn 4.5% in an 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.