'More interest rate cuts likely' as expert predicts three months in 2025 when they will be reduced
The Bank of England has slashed interest rates to 4.5%, marking the lowest level since June 2023.
Previously standing at 4.75% following two reductions over the summer, the rate was lowered once more in response to sluggish economic growth. Here Mirror Money provides an analysis of what this decision implies and the Bank’s expectations for the economy.
What happened to interest rates on Thursday? The Bank of England’s Monetary Policy Committee (MPC) brought down the base interest rate to 4.5%, a quarter-point cut. This is the third time in six months that interest rates have been reduced, after they were decreased from a high of 5.25%.
Over nearly two years from the end of 2021, borrowing costs had been raised as policymakers attempted to tackle skyrocketing inflation. Seven out of nine members of the central bank’s Monetary Policy Committee voted for the reduction, while two members advocated for a steeper drop to 4.25%.
But what does this mean in real terms? The base rate influences how costly it is to secure a mortgage or a loan. Recent hikes have resulted in significantly higher mortgage rates than what was typical for most of the last decade. According to figures from industry body UK Finance, mortgage owners on tracker rates will see their monthly payments decrease by £28.98.
However, the latest cut is unlikely to immediately lower other mortgage rates as it was largely anticipated and thus factored into mortgage offers. The base rate also influences the interest rates offered by banks on savings accounts, which are likely to fall.
What about inflation? The central bank primarily uses interest rate hikes to curb inflation – the rate at which prices increase over time. According to the Office for National Statistics (ONS), the UK’s main measure of inflation, CPI (Consumer Price Index) inflation, slightly decreased to 2.5% in December. The Government and the Bank of England aim for an inflation rate of 2%.
The base interest rate fell to this level last year, but the recent surge in inflation has prompted the central bank to reduce borrowing costs. Thursday’s monetary policy report suggested that inflation could reach a peak of 3.75% late this summer due to rising energy prices, higher water bills and increased bus fares contributing to a rise in the cost of living.
Will rates continue to fall now? The MPC, responsible for making rate decisions, is scheduled to meet seven more times this year, when it can decide whether further cuts to interest rates are necessary. Andrew Bailey, the governor of the Bank of England, reiterated his call for rates to “gradually” fall, stating that the Bank should be “careful” as it considers the broader economic context.
Matt Swannell, chief economic adviser to the EY Item Club, said: “While the MPC stopped short of providing explicit guidance on where interest rates go from here, it indicated that more cuts are likely.” Matt Smith from ING predicts that the Bank’s rate-setters will cut rates again in May, with potential further cuts in August and November to bring rates back down to 2%. At present, the Bank anticipates interest rates to settle back at 2% in the final quarter of 2027.
What does it mean for the Government? Chancellor Rachel Reeves welcomed the interest rate cut as “welcome news”. The decrease in interest rates will aid in reducing the bank’s debt interest payments over the next year.
However, the Bank of England’s decision to downgrade economic growth forecasts for 2025 – from 1.5% to 0.75% – will be a setback for Ms Reeves. The Labour Government has prioritised growing the economy and tied long-term spending plans to expanding the economy and thus tax revenues.
“I am still not satisfied with the growth rate,” added the Chancellor. Mortgage rates remain high, but a cut to the base rate is positive news for the housing market.
Does this mean the economy is doing well? Mr Bailey also stated that the interest rate cut is part of efforts to maintain low inflation, which he described as the “foundation of a healthy economy”. However, he warned of “bumps in the road”. The latest figures indicate that the economy is likely to have shrunk by 0.1% in the last three months of last year, following a flat third quarter.
The Bank of England has slashed the growth forecast for 2025 in half, now expecting just a 0.75% increase, although it anticipates GDP (gross domestic product) will surpass previous expectations by 2026 and 2027.
What impact could Donald Trump and US tariffs have? This announcement is set against a tumultuous week in global economics, provoked by the US Trump administration’s plans for tariffs against China and postponed tariffs on Canada and Mexico. While the Bank’s recent report predates these announcements, there is a recognition that such tariffs could influence global economic progress even without directly affecting the UK.
Mr Bailey expressed, “If there were to be tariffs that contributed to a fragmentation of the world economy, that would be negative for growth for the world economy. I hope that doesn’t happen, but that could happen.” He also noted, “The impacts on inflation are much more ambiguous. It depends on the reaction of other countries to the tariffs, whether that leads to a redirection of trade and what impact that has on exchange rates.”