When will UK interest rates fall further?

Bank of England buildings with tree in foreground

(Image credit: Tupungato via Getty Images)

last updated 10 December 2024

The Bank of England is likely to hold UK interest rates at their current level of 4.75% later this month, according to most experts.

Looking further forward, though, policymakers could cut the base rate four times in 2025, governor Andrew Bailey told the Financial Times last week (4 December).

Bailey said that consumer price inflation has fallen more quickly than policymakers expected a year ago, but added that the Bank’s central thesis still involves pursuing “gradual” interest rate cuts.

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Assuming no movement at December’s Monetary Policy Committee (MPC) meeting, four quarter-point cuts in 2025 would bring the base rate to 3.75%. This forecast is still weaker than previous expectations, though.

“A month or two ago, markets were pricing in a Bank of England base rate as low as 3.5% by next Christmas, but 4% now seems to be the current consensus for 12 months’ time,” says Russ Mould, investment director at platform AJ Bell.

In the latest news published today (10 December), grocery inflation was found to have increased at an annual rate of 2.6% in the four weeks to 1 December, up from 2.3% in the previous month.

It comes after the Consumer Prices Index rose by 2.3% on an annual basis in October, up from 1.7% in September. Higher energy prices were largely responsible for the rise.

Why have interest rate expectations been scaled back?

Measures announced in the Autumn Budget have altered the inflation outlook, and are expected to keep prices marginally higher for longer.

Chancellor Rachel Reeves unveiled £70 billion in spending policies and £40 billion in tax hikes, with the majority of this being funded by an increase in employer National Insurance contributions.

There are fears that businesses could pass these costs on to consumers, putting prices up in an attempt to protect their margins.

The fiscal watchdog says it expects policies announced in the Budget to push inflation up by 0.4 percentage points, once they hit peak effect.

This might sound like a small number when you consider inflation hit 11.1% at its peak, but it has been enough to prompt economists to scale back their interest rate forecasts.

Other risks on the global stage include an escalation in the Middle East, and the threat of tariffs from president-elect Donald Trump.

Will interest rates continue to fall in 2025?

Interest rates are expected to fall further next year, although experts warn they are unlikely to return to the ultra-low levels we experienced for over a decade after the Global Financial Crisis.

In its latest economic outlook, the Organisation for Economic Cooperation and Development (OECD) said it expects UK rates to have dropped to 3.5% by early 2026.

The team at Capital Economics also expects rates to hit 3.5% by early 2026, having tempered its expectations in the aftermath of the Budget.

“In light of the Budget, we revised up our GDP and core inflation forecasts. As a result, we no longer think the pace of rate cuts will quicken in the second half of 2025, and we now think rates will fall only as far as 3.50% in early 2026 rather than 3.00%,” says Ruth Gregory, deputy chief UK economist at the consultancy.

Capital Economics hasn’t changed its 3% estimate of the neutral rate, but instead thinks rates will now stay above neutral for longer.

The “neutral rate” can be defined as the rate at which the economy is in a state of equilibrium with full employment, stable inflation, and monetary policy that is neither contractionary nor expansionary.

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.

What do falling interest rates mean for mortgages?

Mortgage rates have fallen from their peak, but remain significantly higher than the levels enjoyed for much of the past decade:

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.
Today’s rates: Today, average rates have fallen to 5.48% and 5.25%.
Pre-pandemic rates: In 2019, both the two and five-year rates were below 3%.

Furthermore, there is still a fair amount of volatility in the market. Mortgage rates picked up slightly in the aftermath of the Budget, despite the Bank of England’s decision to trim rates on 7 November. This shows that mortgage rates don’t always fall in tandem with base rate cuts.

“The mortgage market is a whirlwind of mixed signals right now,” says Ranald Mitchell, director at Charwin Mortgages. “One minute rates are being slashed to lure first-time buyers, and the next, they're rising or products are vanishing altogether.”

Despite this, first-time buyers and those approaching the end of a relatively cheap five-year fixed deal will be hoping for further base rate cuts in 2025.

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. The top easy-access account now pays 4.85%, according to Moneyfacts. Until recently, savers could still find 5% deals.

You might want to consider fixing your savings if you have a pot of money you are willing to put away for a period of time. This should allow you to lock in higher rates for longer – but you will need to act quickly.

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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Katie has a background in investment writing and is interested in everything to do with personal finance, politics, and investing. She enjoys translating complex topics into easy-to-understand stories to help people make the most of their money.

Katie believes investing shouldn’t be complicated, and that demystifying it can help normal people improve their lives.

Before joining the MoneyWeek team, Katie worked as an investment writer at Invesco, a global asset management firm. She joined the company as a graduate in 2019. While there, she wrote about the global economy, bond markets, alternative investments and UK equities.

Katie loves writing and studied English at the University of Cambridge. Outside of work, she enjoys going to the theatre, reading novels, travelling and trying new restaurants with friends.