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

The Bank of England has kept interest rates frozen at 5.25% for almost nine months.

This bank rate freeze has been kept in place in a bid to bring down the UK's inflation rate. It appears to have worked somewhat, as the Consumer Prices Index (CPI) measure of inflation dropped to 3.2% in March. It means inflation has fallen significantly since October 2022, when it hit 11.1% - although it is still above the UK central bank's target of 2%.

While this may seem like the UK economy's in a better place, data within the data has led to market jitters about when the Bank of England will cut its base rate. Wage growth remains much higher than inflation. And despite GDP figures showing the UK entered a recession in the final half of 2023 - an economic event that can slow inflation down - growth appears to be rebounding at a pace that suggests the Bank could go further with its interest rates freeze.

Subscribe to MoneyWeek

Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE

Get 6 issues free

Sign up to Money Morning

Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter

Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter

Sign up

The situation has seen mortgage rates increase for the first time since last summer. On the flipside, top savings accounts are continuing to offer above-inflation interest. But when can we expect interest rates to fall?

What does inflation mean for interest rates?

The BoE hiked the base rate for over a year and a half from late 2021 until August 2023 as it tried to battle inflation. This was part of the reason why mortgage rates rocketed - although they are mostly set by market sentiment, and gilt yields.

In theory, when the central bank increases interest rates, it reduces the flow of money around the economy. In other words, the Bank expects to reduce spending when rates go up, which can in turn bring the rate of price rises down as demand drops.

While the Consumer Prices Index (CPI) measure of inflation 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. The next CPI will be published on 22 May.

Analysts expect inflation to fall rapidly in 2024. 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.

After the Spring Budget, the Office for Budget Responsibility (OBR) said it expected inflation to hit an average of 2.2% over the course of 2024, and 1.5% during 2025, before it climbs back towards the Bank of England’s 2% target.

However, it also warned that any escalation in the Middle East could mean inflation comes in above these estimates, possibly as high as 6%, due to the knock-on effects for energy prices and the cost of oil. The independent public body said that without a deeper Red Sea crisis, it thinks interest rates could fall to 4.2% by the final quarter of the year and 3.3% in 2025.

Within the headline inflation data, there are yardsticks the Bank of England follows closely that can influence its rate-setting decisions. The main ones it keeps an eye on are core inflation (a measure of inflation that strips out volatile categories, like food and energy) and services inflation (i.e. the rate of price rises for key services). Both can be a sign of how embedded inflation is in the economy.

The Bank also follows wage inflation closely, as this measure can suggest whether a rise or fall in inflation is coming. The latest set of figures showed wages continued to outstrip headline inflation, which has led some analysts to warn that base rate cuts could be delayed. We will find out whether this continued to be the case when the next set of data is published on 14 May.

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. However, there have been slight changes in when the markets expect to see cuts, and how far they expect the Bank of England will go.

Before April, traders had been expecting around three interest rate cuts in 2024, with the first coming at the Bank's May or June meetings. Indeed, major mortgage lenders cut their rates earlier this year in anticipation of this.

While, at its most recent meeting, the MPC hinted interest rate cuts could be coming soon, the April wage and inflation data has dampened expectations as both came in worse than expectations. Growing US inflation has added to market concerns that the UK central bank may not be done with its rate freeze - or even rate increases. In part, this has been one of the drivers of growing mortgage rates (more on this below).

But, with Bank of England governor Andrew Bailey insisting UK inflation is "rather different" to that being seen on the other side of the Atlantic - and a doveish intervention from deputy governor Dave Ramsden in mid-April - mainstream economists expect cuts will soon be on their way.

Deutsche Bank says it expects a 0.75 base point drop in 2024, with three cuts taking the Bank Rate down to 4.5%. It has pushed its expectations for the start of this cycle back from May to June since the last set of inflation data.

A slightly less optimistic view has been advanced by Capital Economics. Its chief UK economist Paul Dales suggests there's a fairly narrow route to a June rate cut. He says: "For our forecast that rates will be cut to 5% at the next meeting in June to be right, one of two things probably need to happen. First, in May the Bank signals the first rate cut is close, and the data released between the May and June meetings are as the Bank expects.

"Second, the Bank could leave its inflation forecast and the key phrases in the policy statement largely unchanged, but the incoming data [comes in] weaker than it expects."

In the event of these two things happening, Capital Economics expects rates cut tumble to 4% by the end of 2024. But given the rocky road inflation has been on since it started to come down in late-2022, there are no guarantees either scenario could come to pass.

One big potential sticking point could be the rise in the minimum wage, which will be reflected in April's wage data (set to be published in mid-May) - although inflation is expected to drop significantly in the same month due to the reduction in energy bills. If June comes and goes without a cut, Dales expects one will be on its way in August with another coming later in the year to reduce the Base Rate to 4.75%.

James Smith, developed markets economist at ING Economics, is another who expects cuts will beat market expectations. He says he now expects rates to start to fall from August, although he added that some traders are not expecting one until November.

Smith says the March services inflation data, which came in at 6% rather than the 5.8% the Bank had been hoping for, "reinforces our view that it could prove a little stickier than the Bank is forecasting in the near term".

He adds: "There’s still scope for surprise and the Bank will want to see the data on this before committing to any policy action. That all but rules out a rate cut in May, and if we’re right that April’s data proves stickier than the Bank is expecting, then we think that would drastically reduce the chances of a cut in June, too.

"We think April’s services inflation could come in at 5.6% versus the BoE’s forecast of 5.3%. Our base case is that the Bank will cut rates for the first time in August."

Smith has added that it will be a "close call" as to whether the Bank goes for a rate cut in June or August. He also reckons it will diverge from the Federal Reserve, which is expected to take a firmer line for longer given the US's spike in inflation.

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 21 March 2024, when it decided to maintain interest rates at 5.25%.

The next interest rate meeting will take place on 9 May 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.

The good news is that much of the impact of higher mortgage rates has already been passed through to mortgage payers, meaning there will (hopefully) be no further nasty surprises for most homeowners when they come to remortgage. The bad news for around 1.6 million mortgage payers is that their deals will expire this year, meaning they will be exposed to the higher rates.

Mortgage rates have been significantly higher than those seen towards the end of the 2010s since Liz Truss's disastrous mini-Budget. The fiscal event drove the biggest base rate increase in decades, which was followed up by a further seven hikes. This happened because the markets felt the levels of government borrowing and spending needed to execute Truss's plans would send inflation even higher, and crash the value of the pound.

Rates rose even more last summer as the markets began to question how fast inflation would fall, if indeed it would fall at all. Both this, and the mini-Budget, mean markets remain jumpy whenever there's a lower-than expected fall in inflation - or another economic hurdle, like above-inflation wage growth - that could delay base rate cuts.

These underlying sentiments have partly been responsible for the rise in mortgage rates over the past two months. Lenders had been trimming rates into the New Year until inflation failed to go down as much as expected in January.

The Bank of England then hinted interest rate cuts were still a way off. It initially led to a slowdown in mortgage rate cuts before they started going up again in late February. This situation has already had a knock on effect on the housing market, according to recent house prices research by Nationwide.

Nicholas Mendes, mortgage technical manager at brokerage John Charcol, says: "Lenders have recently adjusted their positions in response to market uncertainty. While mortgage holders are unlikely to experience the same level of volatility and high rates as last year, many may find themselves pondering their next steps as their current deals approach expiration."

He adds: "Swaps had increased at the end of last week following recent [inflation] announcements in the UK and US, with speculation building momentum that a bank rate reduction would be delayed to August and diminishing the likelihood of two or three bank rate reductions this year."

Mendes says homeowners who are about to remortgage should speak with a broker, and avoid the temptation to "wait and hold out for the best deal".

What will it mean for my savings?

Savings rates rose rising rapidly last year, but are now starting to plateau, and in some cases, fall. Many of the best savings rates are already disappearing from the market so it is vital to act fast to grab the top rates.

"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.