Are UK interest rates expected to fall soon?

LONDON – After a relentless two-year campaign of rate hikes to tame runaway inflation, the critical question dominating financial markets, boardrooms, and household budgets across the United Kingdom is no longer if interest rates will fall, but when. The Bank of England has held its base rate at a 16-year high of 5.25% since August 2023, but with inflation falling sharply from its peak, the pressure is mounting for a pivot towards monetary easing that could bring relief to millions.

While a rate cut in the immediate future appears unlikely, a delicate balancing act is underway. The Bank’s Monetary Policy Committee (MPC) remains laser-focused on crushing inflation back to its 2% target, wrestling with persistent wage growth and services inflation on one side, and a fragile, stagnating economy on the other. The timing of the first cut is now the subject of intense debate among economists, with the path ahead dependent entirely on the economic data of the coming months.

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The Current Stance: A Cautious Hold

The Bank of England's primary mandate is to maintain price stability. To that end, it has held its nerve, keeping the base rate at 5.25% through its last several meetings.

The decision reflects a deep-seated concern that cutting rates prematurely could allow inflation to become entrenched. In its latest communications, the Bank has stressed it needs to see more conclusive evidence that price pressures, particularly those generated within the domestic economy, are firmly under control before it can act.

This "higher for longer" stance is designed to ensure the hard-won gains against inflation are not squandered.

What is the Bank of England's Base Rate?

The base rate is the most important interest rate in the UK economy. It is the rate the Bank of England charges commercial banks for overnight borrowing.

This rate serves as the foundation upon which all other borrowing and saving rates are built. When the base rate changes, it directly influences:

• Mortgage Rates: The cost for homeowners to borrow money for property.
• Loan Rates: The interest charged on personal and business loans.
• Savings Rates: The return savers get on their cash deposits.

By raising the base rate, the Bank makes borrowing more expensive and saving more attractive, which cools demand in the economy and helps to lower inflation. Conversely, cutting the rate is intended to stimulate economic activity.

The Case for an Interest Rate Cut

Arguments for a rate cut are growing louder, centred on a dramatically improved inflation outlook and a weak underlying economy that is crying out for a boost.

• Falling Headline Inflation: The most compelling argument is the rapid descent of the Consumer Prices Index (CPI). Having peaked at a painful 11.1% in October 2022, headline inflation has fallen significantly and is now on a clear trajectory towards the Bank's 2% target. This drop has been driven largely by falling energy and food prices.

• Economic Stagnation: The UK economy has been flatlining. It slipped into a technical recession in the second half of 2023, with GDP figures showing an economy struggling for momentum. High interest rates are acting as a major brake on growth, and a rate cut would be a powerful tool to stimulate investment and consumer spending.

• Easing Labour Market: While still tight by historical standards, the UK labour market is showing signs of cooling. Vacancy numbers are falling and unemployment has ticked up slightly, suggesting that the intense wage pressures of the past year may begin to moderate, reducing a key driver of domestic inflation.

The Counter-Argument: Why the Bank Remains Hesitant

Despite the positive inflation news, several stubborn factors are giving the MPC pause and fuelling the case for caution.

• Sticky Services Inflation: While inflation on goods has fallen, inflation in the services sector (which includes everything from haircuts and hospitality to transport) remains stubbornly high. This type of inflation is closely linked to domestic wage growth and is considered a more accurate barometer of underlying price pressures. The Bank is determined to see services inflation fall decisively before it cuts rates.

• Persistent Wage Growth: Annual wage growth is still running at a level—around 6%—that the Bank considers inconsistent with its 2% inflation target. High wages increase business costs and boost consumer spending power, both of which can fuel inflation. The MPC needs to see a sustained slowdown in pay awards.

• Geopolitical Risks: Global uncertainty, including ongoing disruption to shipping in the Red Sea, presents a risk of renewed supply chain pressures. Such events could push up the cost of imported goods and complicate the path back to 2% inflation, making the Bank wary of easing policy too soon.

Expert Forecasts and Market Expectations

The consensus among City analysts and economists is that the first rate cut will likely occur in the summer or early autumn of 2024. Market pricing currently points towards August or September as the most probable timing.

The split vote at recent MPC meetings provides a crucial clue. While a majority has consistently voted to hold rates, a minority of members have already voted for a cut, indicating a clear shift in the committee's thinking.

• Summer 2024 (June/August): This timeline is considered possible but is highly dependent on the next few inflation and wage data releases. A surprisingly low reading in either could pull the first cut forward to June.

• Autumn 2024 (September): This is viewed by many as the most likely scenario. It would give the Bank several more months of data to confirm that inflation is sustainably returning to target before committing to a cycle of rate cuts.

• Later in 2024: If wage growth or services inflation proves more resilient than expected, the first cut could be pushed back to November or even into 2025.

Implications and The Path Ahead

The timing of the first rate cut will have significant real-world consequences for households and businesses.

• For Mortgage Holders: Borrowers on tracker or variable-rate mortgages will see an immediate reduction in their monthly payments when rates fall. Those on fixed-rate deals will not see a change until their term ends, but a lower base rate will lead to more competitive remortgaging deals.

• For Savers: A rate cut will signal the end of the high-yield savings environment. Banks will quickly reduce the interest rates offered on savings accounts, reducing the returns available on cash deposits.

• For Businesses: Lower borrowing costs will make it cheaper for companies to invest in expansion, equipment, and hiring, providing a much-needed stimulus for the wider economy.

Ultimately, the Bank of England remains in a "data-dependent" mode. The key indicators to watch will be the monthly CPI inflation figures and the labour market reports. Until the data provides a clear and unambiguous signal that the inflation battle is won, the Bank will continue its cautious watch. The direction of travel is towards lower rates, but the exact timing of the departure remains the UK's most pressing economic question.