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

The Bank of England has kept interest rates at 5.25% for 10 months. Will the base rate go down this summer?

Interest rates represented by an image of the Bank of England with traffic zooming around it
(Image credit: Getty Images)

The UK central bank will give its decision at 12pm this Thursday on whether or not it will cut interest rates. 

Almost three years after UK inflation first moved above the Bank of England’s 2% target, data from the Office for National Statistics (ONS) shows prices have finally hit the central bank's goal. Figures published on 19 June show inflation slowed to 2% in the 12 months to May, down from 2.3% in April. 

Although the Bank of England has always said it will not reduce interest rates until inflation falls back to 2%, the consensus is that the central bank will leave them as they are on Thursday for the seventh consecutive time.

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The sense is that Thursday’s decision comes too soon for the Bank to begin lowering rates, which are currently at a 16-year high of 5.25%. The bank could also be concerned about a rate cut getting politicised, with the general election just around the corner. 

A group of analysts for AJ Bell say: “Governor Andrew Bailey and his colleagues on the [Monetary Policy Committee (MPC)] may not wish to act in any way that could be seen as favouring one political party over another in the run-up to July’s poll.” 

The Bank is abiding by the rules of the pre-election campaign period, ­meaning its policymakers cannot make any speeches or public statements.

Sandra Horsfield, an economist for Investec, said this matters because, were policymakers to “surprise” the market with their decision on Thursday, they would not be in a position to “correct any misinterpretations” about their rates decision until after the election, which is on 4 July.

Stubborn services inflation could keep rates on pause

Additionally, although inflation fell, ‘core’ inflation, which is a longer-term measure that excludes transitory price changes in things like energy and food, remains at 3.5%. Meanwhile, services inflation is at 5.7%. 

James Smith, developed markets economist at ING, says: “For the Bank of England, it’s services inflation that matters and for the second month in a row this has come in higher than expected.

“Indeed at 5.7%, it’s now 0.4 percentage points above the BoE’s forecast from May. That all but confirms it will keep rates on hold tomorrow.”

After the last meeting, Bailey said that a June cut was not ruled out, but he added that it wasn’t a “fait accompli” either. “Before our next meeting in June, we will have two full sets of data for inflation activity and the labour market, and that will help us in making that judgement afresh,” he explained.

That data has now come in and core inflation, services inflation and wage growth are still higher than many would like. As a result, households, investors and businesses will probably need to exercise patience for another couple of months. 

The Bank of England will not meet in July, which means the next meeting after tomorrow is on 1 August.

How does inflation influence interest rates?

Over the past couple of years, we have lived through the highest inflation in a generation. 

The pandemic disrupted supply chains and, when the world emerged from Covid lockdowns, there was a sudden burst of spending. Then, Russia invaded Ukraine in February 2022 and this caused energy prices to spike, further contributing to wider price rises. 

Since then, we have seen some of the second-round effects of this inflation. Wages have been rising (to keep pace with higher prices), and businesses have been passing these costs on to consumers by putting up their prices.

In an attempt to control this, the Bank of England hiked the base rate over a period of more than a year and a half from late 2021 until August 2023. 

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

When will interest rates fall?

Barring any economic shocks, interest rates have peaked. The question now is how long the Bank of England will hold rates at 5.25%. 

Over the past few months, we have seen the MPC start to turn – however it remains visibly divided. In April’s meeting, one committee member voted for a rate cut. This increased to two committee members in May. 

The Bank of England has five remaining meetings this year – see our roundup of upcoming MPC meeting dates. As introduced previously, most experts think the first cut will come in August or September. 

In a recent poll from Reuters, 63 out of 65 economists voted for August as the most likely month. The two who disagreed with the consensus pointed to September, with none of the respondents voting for June. 

“Most of them expect at least one more reduction this year despite persistently high pay and services inflation,” the news agency adds.

This is a marked change from a few weeks ago. Before April’s inflation data was released, economists had been split between June and August. 

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 holders, meaning there will (hopefully) be no more nasty surprises for most homeowners when they come to remortgage. 

However, the bad news for around 1.6 million mortgage holders is that their deals will expire this year.

Ever since Liz Truss’s disastrous mini-Budget, mortgage rates have been significantly higher than those seen towards the end of the 2010s. Rates rose even more last summer as markets began to question how fast inflation would fall, if indeed it would fall at all. 

Markets remain jumpy whenever there's a lower-than-expected fall in inflation, or another economic hurdle that could delay base rate cuts. They are still volatile to this day and have risen for the last four months in a row. 

Mortgage rates are expected to come down once the Bank of England starts cutting the base rate. Homeowners and prospective first-time buyers will be watching this closely. That said, Mark Harris, chief executive of mortgage broker SPF Private Clients, says the base rate is only part of the picture when it comes to mortgage pricing.

"If swap rates, which underpin the pricing of fixed-rate mortgages, edge further downwards, then lenders will introduce cheaper mortgage rates, increasing the choice for borrowers at more palatable pricing," he explains.

What will it mean for my savings?

Savings rates rose 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. 

“The implications of any possible reductions to the base rate may mean some people will be keen to grab a deal quickly and review their existing accounts,” says James Hyde, Moneyfacts spokesperson. 

He adds: “For those willing to lock their cash away for a set period, there are still some one and two-year fixed bonds paying over 5% interest. Some easy-access accounts also pay above this threshold at present, though these rates are subject to change with very short notice.

“Whichever options savers choose, any clear indications of an impending base rate cut could lead to significant movement in the market, so it’s always worth keeping an eye out and being prepared to switch if necessary.”

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

Katie Williams
Staff Writer

Katie has a background in investment writing and is interested in everything to do with personal finance and financial news. 

Before joining MoneyWeek, she worked as a content writer at Invesco, a global asset management firm, which she joined as a graduate in 2019. While there, she enjoyed translating complex topics into “easy to understand” stories. 

She studied English at the University of Cambridge and loves reading, writing and going to the theatre.