The Bank of England is expected to cut interest rates before Christmas, according to financial forecasts.
The central bank held interest rates at 4 per cent at its last meeting on 6 November as it continued to tread carefully amid fears of resurgent inflation.
The knife-edge vote saw five members of the Bank’s Monetary Policy Committee vote to keep the base rate at 4 per cent, while four members voted to reduce it to 3.75 per cent.
It is the second time the rate has been held following the bank’s previous decision in September.
In August, the bank cut interest rates from 4.25 to 4 per cent, down from a high of 5.25 per cent the previous year.
The next decision will take place on 18 December, with the majority of analysts now expecting a cut to 3.75 per cent.
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Rates headed down: The Bank of England is expected to cut interest rates again at its next meeting in December
What next for interest rates?
While interest rates will likely fall to 3.75 per cent in December, at present markets only expect one further quarter point rate cut in the first half of next year.
This could mean that interest rates are at 3.5 per cent in about six months time.
There are some forecasts that suggest interest rates will fall further. HSBC and UBS for instance have this year forecast that interest rates will fall to 3 per cent by the end of 2026.
There are also some that think interest rates will stay higher. Analysts at Pantheon have forecast that interest rates will actually finish 2026 at 4 per cent.
The base rate and the Bank of England
The Bank of England moves what is officially known as bank rate but more commonly called base rate to try to control inflation.
Base rate is the single most important interest rate in the UK. It determines the interest rate the Bank of England pays to commercial banks that hold money with it and therefore influences the rates those banks charge people to borrow money or pay on their savings.
The theory is that raising interest rates lifts the cost of borrowing for individuals and businesses and thus reduces demand for it, slowing the flow of new money into the economy and applying the brakes.
In contrast, cutting interest rates lowers the cost of mortgage rates and other borrowing and increases demand, pushing the accelerator on the economy.
Higher savings rates also make saving more attractive, while lower rates encourage spending over setting money aside.
The MPC sets interest rates to try to keep consumer prices inflation (CPI) at the Bank and Government’s 2 per cent target.
> Interest rate rise and fall calculator: How moves affect your payments
Cause and effect: Inflation and wage growth are both factors that could determine what the Bank of England will do with base rate in the future
What’s happened to inflation and interest rates?
Higher than expected inflation could result in MPC members refraining from rate cuts in the future.
A major inflation spike over recent years saw CPI rocket into double-digit territory, driven by the aftermath of the disruptive Covid lockdowns combined with an energy price crisis triggered by Russia’s invasion of Ukraine.
This saw the Bank of England raise base rate rapidly from its record low of 0.1 per cent, reached during the Covid pandemic years.
The first move up to 0.25 per cent came in December 2021 and a sharp series of rises from the MPC followed, driving base rate all the way up to 5.25 per cent in August 2023.
Rates were then held at 5.25 per cent until August 2024 until they were gradually cut over the next 12 months to 4 per cent where they remain today.
Inflation rose to 3.8 per cent in the 12 months to September, the same as in August and July and up from from 3.6 per cent in the 12 months to June.
This means it still sits significantly higher than the Bank of England’s 2 per cent target.
What a base rate cut would mean for savings and mortgage rates
Many people assume that savings rates and mortgage rates are directly linked to the Bank of England base rate.
In reality, future market expectations for interest rates and banks’ funding and lending targets and appetite for business are what really matters.
Market interest rate expectations are reflected in swap rates. A swap is an agreement in which two banks agree to exchange a stream of future fixed interest payments for another stream of variable ones, based on a set price.
These swap rates are influenced by long-term market projections for the Bank of England base rate, as well as the wider economy, internal bank targets and competitor pricing.
In aggregate, swap rates create a benchmark of where the market thinks interest rates will go – though they can shift quickly in light of economic changes.
Current swap rates suggest mortgage rates won’t fall much further over the coming years.
As of 18 November, five-year swaps were at 3.62 per cent and two-year swaps were at 3.51 per cent.
Any borrowers hoping for a return to the rock bottom interest rates of 2021 will likely be disappointed. However, savers will be reassured that rates are not expected to plummet to the depths again.
Richard Carter of Quilter Cheviot says: ‘Swap rates are a useful indicator of current expectations, but it is important to remember they are no better at predicting the future than any other economic indicator. The economic outlook can change very quickly and very dramatically.’
> Saving and banking: Read the latest on savings rates and top deals
Sticky: Higher than expected inflation could result in MPC members including Andrew Bailey (pictured) refraining from rate cuts in the future
What should savers do?
Experts foresee savings rates falling – though if the base rate doesn’t fall again in 2025, they may stay higher for slightly longer.
Savers can still get over 4 per cent in an easy-access savings account and the best fixed rate savings pay close to 4.5 per cent.
The good news is that with inflation at 3.8 per cent, it means savers who hold their cash in the top paying accounts could still be making a real return, before tax – but it’s very marginal.
Our savings tables show the best easy-access savings, top cash Isas and fixed rate savings deals.
The advice to savers has been to keep on top of the changing market if they want to secure a competitive deal.
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What next for mortgage rates?
Mortgage rates have remained fairly stable this year with the lowest fixed rate tending to hover just below 4 per cent.
The average two-year fixed rate across all mortgage products is now 4.89 per cent, according to rates scrutineer Moneyfacts, slightly below the average five-year deal at 4.94 per cent.
It means that the typical household fixing a £200,000 mortgage for two years with a 25-year repayment term will be paying £1,156 a month.
However, the lowest fixed rate mortgages are currently just above 3.5 per cent and most borrowers will find they will be able to secure a rate below 4.25 per cent, though this depends on their deposit or level of equity.
Will borrowers benefit from future base rate cuts?
Future base rate cuts are already largely baked into fixed-rate mortgage pricing.
This means most borrowers won’t notice much difference when it comes to their mortgage rates – even with further base rate cuts down the line.
The bulk of mortgages are fixed-rate, so the base rate change won’t have any immediate impact until their fixed term ends.
The mortgage borrowers who stand to benefit the most are those on tracker and variable rates.
Variable rate mortgages include ‘discount’ rates and also standard variable rates (SVRs). Monthly payments on all these types of loan can go up or down.
Tracker rates follow the Bank of England’s base rate plus a set percentage, for example base rate plus 0.5 per cent. They often come without early repayment charges, allowing people to switch whenever they like without incurring a penalty.
Standard variable rates are lenders’ default rates that people tend to move on to if their fixed or other deal period ends and they do not remortgage on to a new deal.
These can be changed by lenders at any time, and will usually rise and fall when the base rate does – but they can go up or down by more or less than the Bank of England’s move.
According to Moneyfacts, the average SVR is 7.27 per cent, which is a lot higher than the average of 4.4 per cent in December 2021 when base rate was just 0.1 per cent – but it will vary from lender to lender.
