Interest rates are likely to fall next in February and will not fall below 4 per cent until the end of 2025, according to a widespread survey of economic forecasters by i.
The Bank of England cut rates to 4.75 per cent in November, but after inflation rose by more than expected in figures released on Wednesday, economists questioned by i unanimously believe the bank will not choose to make another cut in December.
Most of those polled believe there will be four cuts from the eight Monetary Policy Committee (MPC) meetings in 2025, though some believe there will be three.
As recently as September, there were claims from some economists that there could be cuts to rates in November and December, though the consensus is now that a cut in December is extremely unlikely.
High interest rates will increase the cost of mortgages, placing more pressure on Chancellor Rachel Reeves over the cost-of-living squeeze facing families already dealing with rising household bills.
Higher borrowing costs will also increase the amount of money spent on servicing the national debt, further reducing the Government’s fiscal headroom.
Of 10 organisations polled by i, six expect rates to reach 3.75 per cent, two expect them to reach 4 per cent and two expect 3.5 per cent by the end of 2025.
Ruth Gregory, deputy UK chief economist at Capital Economics, which is forecasting four cuts next year starting in February, said: “October’s surprisingly large rebound in CPI inflation from 1.7 per cent to 2.3 per cent won’t stop the Bank from cutting interest rates further.
“But it lends some support our view that the Bank will skip the December meeting and cut rates only gradually, by 25 basis points in February and at every other policy meeting until rates reach 3.5 per cent in early 2026.
“Barring a major downside surprise in November’s inflation data, the Bank will almost certainly leave rates unchanged at 4.75 per cent at its next meeting in December.”
Robert Wood, of Pantheon Macroeconomics, said that there would only be three cuts next year, taking the bank rate to 4 per cent.
He wrote in a note on Wednesday: “October’s reading marks the start of a gradual climb in inflation to a peak of 3 per cent in April next year, as the energy price drag fades and service price inflation remains too high for the headline CPI to stay sustainably at 2 per cent.
“October’s inflation data were strong enough to prevent a December rate cut, but we think the underlying picture is reassuring enough to make a February interest rate cut very likely.”
Sanjay Raja of Deutsche Bank forecasts that rates could get as low as 3.5 per cent by the end of next year, with cuts in February, March, May, August and November.
Paul Hollingsworth, head of DM Economics at BNP Paribas, added: “The above-consensus rise in UK headline, core and services inflation in October will keep the Bank of England on its toes and suggests that a gradual pace of rate cuts remains the most likely path from here.”
The Chancellor will be hoping rates are cut as quickly as possible, in order to ease the pressure on household finances. Lower rates also reduce the cost of interest payments on the debt held by the Government.
This week, Sir Keir Starmer insisted that mortgage rates would fall during Labour’s time in office, telling reporters: “They’re individual decisions for the banks, but the interest rates will be coming down.” He added: “What we have done with the Budget is to stabilise the economy and that, in my view, was the essential first step. As a result of that, the forecasts are for interest rates to go down, inflation to go down – you saw the figures around the Budget.”
High interest rates pushing up the cost of servicing a mortgage were widely seen as one reason behind Rishi Sunak’s defeat at the general election, as middle-class voters turned against the Conservatives.
What could happen to mortgage rates?
Higher interest rates generally mean higher mortgage rates, as fixed mortgage costs are based on long-term predictions for where the base rate will go in the future.
Recent predictions that inflation will rise further have prompted many mortgage lenders to pull their best deals.
There are now no deals below 4 per cent available across the whole of the UK.
The cheapest two-year mortgage being a 4.22 per cent fix from Nationwide and the cheapest five-year year is a 4.12 per cent deal from HSBC.
Experts predict that there will be no further cuts to mortgage rates this year, but that there could be some reductions in 2025.
At the same time, savings deals are beginning to fall as a result of lower interest rates, with experts encouraging customers to lock in rates now before they fall even further.
The Bank of England generally cuts interest rates as it becomes confident that inflation is returning sustainably to its 2 per cent target.
In September’s reading, inflation stood at 1.7 per cent, but has since risen to 2.3 per cent and is expected to rise further.
Many economists had previously expected interest rates to fall faster than they have done.
Predictions now suggest a slower rate of cuts, partly because of the impact of October’s Budget, which is expected to be inflationary.
Deutsche Bank Research said in a note last week for example: “Administrative tax changes as per the autumn Budget have raised our forecasts by nearly 0.1 percentage points in 2025.”
What economists are forecasting
Below are what economic forecasters are predicting interest rates will be at the end of 2025.
Every forecaster i spoke to said that the next rate cut – from 4.75 per cent to 4.5 per cent – would come in February.