The Bank of England is set to meet on 8 May and interest rates are widely expected to be cut 25 basis points down to 4.25 per cent – but homeowners and businesses might be pleased to know the drop won’t stop there.
While the BoE has pledged a gradual approach to cutting rates, in fear of letting inflation run riot again as it did two years ago, many experts are now foreseeing at least a further two cuts in 2025 – and one, Barclays, believes the UK may now see four consecutive cuts to the interest rate.
That would take the base rate down to 3.5 per cent, a level it has not been at for more than two years, since January 2023.
Here’s what such a reset would mean for your money – and why it still might turn out differently.
Below three percent by next year?
Research undertaken by Barclays analysts expect the BoE’s Monetary Policy Committee (MPC) to vote either 8-1 or 9-0 in favour of a one-step cut in May. They expect further 25 basis point cuts in June, August and September down to 3.5 per cent base rate.
Another financial powerhouse, Morgan Stanley, have gone even further.
They are predicting a cut as low as 3.25 per cent by the end of 2025, with another deeper cuts to 2.75 per cent by mid-2026 – almost two percentage points lower than where we stand right now in a little more than 12 months.
Upcoming data is key
Barclays forecast that inflation expectations may be marginally lowered when the MPC give their decision, but one big factor is still at play – data from April.
That month’s numbers will be key in a whole range of areas, as it’s the start of when higher labour costs in the UK came into play, minimum wage went up (so more spending power for some earners) and when some businesses may have hiked costs.
In addition it’s also the start of when the Trump tariff war began, with a lot of uncertainty and back-and-forth over what those tariffs meant and what levels they were at over the first few weeks.
Therefore, both employment and spending data could give vital insight as to what to expect across the rest of the year, while price points for the likes of gas, exchange rates and more also play a part in their complicated decision-making.
Thomas Pugh, economist at consulting firm RSM UK, provides context for a slightly slower rate of cuts.
“There is a chance of consecutive cuts in May and June, but we think inflationary pressures will keep the MPC on its quarterly path unless there is clear evidence of a downward shift in growth,” he said.
Mortgage rates could drop further
As we’ve detailed previously, mortgage rates are based on the bank rate but are not explicitly tied to the timing of changes of it – they factor in swap rates, which are market expectations of what will happen with interest rates.
As such, the current options on the mortgage market largely already factor in May’s expected drop, so no additional decrease should be expected for the most part – though individual products are always subject to change with lenders of course.
However, across the course of 2025 we may see increasingly competitive pricing and rates, especially if the large drops predicted by Barclays and Morgan Stanley come to pass.
That means homeowners whose fixed rate terms are due to expire soon have a decision to make – but Luther Yeates, head of mortgages at Orton Financial, warns that even those who don’t want to wait for lower rates should make sure they don’t just take what’s on offer.
“Many homeowners don’t realise that by simply switching to a more competitive rate, they could save money. While sticking with your current lender may seem like the easiest option, this convenience can come at a cost,” he said.
“Switching lenders doesn’t have to be costly or time-consuming. In many cases, lenders will cover the legal and valuation costs. So, if your mortgage is up for renewal, don’t just accept the offer — shopping around could save you thousands.”
Savings rates will tumble – make the most of them
As usual, we must serve the reminder that the other side of the interest rates coin is savings accounts – which will naturally see their offerings decrease when the bank rate goes down.
There are still several options offering more than 4.5 per cent interest on cash savings and if you are able to lock in these terms for a set period, or open a regular saver offering an even higher rate, now is the time to commit.