Important information - the value of investments and the income from them, can go down as well as up, so you may get back less than you invest.
Changes in the official Bank of England interest rate impacts our finances in a variety of ways.
They can set the direction of the rates we pay on borrowing, including mortgages, loans and credit cards, and they also influence the interest on offer from cash accounts. In turn, this can affect the pricing of other assets like shares and bonds.
In setting its official rate, the Bank of England takes account of factors such as growth and inflation, meaning that the direction for rates also gives us an indication of what’s going on in the economy. At the December 2024 meeting of the Bank’s Monetary Policy Committee, the body that sets rates, policymakers voted six to three to hold rates at 4.75%.
What does 2025 hold for interest rates? Here we look at current financial markets, official data and expert opinions to try to answer that question. We’ve also looked specifically at what might happen to cash savings rates here.
What markets are telling us
The price of certain financial assets can tell us what the market - which means the collective knowledge of buyers and sellers - thinks will happen with rates. Specifically, we can look at the current price of government bonds maturing at different points in the future to find out what the markets think will happen.
The chart below shows how the market thinks rates will change over the next 18 months. It shows that the direction of rates is likely to be downwards.
Charts like this are best used as a broad indicator of the trend rather than a firm predicter of the future. This shows rates falling to an indicative level of around 4.23% by the end of 2025. The Bank of England tends to move rates in 0.25 percentage point increments so the rate reductions indicated here would mean two to three rate cuts across next year.
Bear in mind that the numbers and the path for rates you see here are only indicative.
Inflation
The Bank of England’s primary objective in setting interest rates is to keep inflation under control. It has a target, set by the government, of keeping inflation within a range of around 2% a year. If it believes inflation is likely to trend higher than that it will keep rates higher to remove demand from the economy and help pull prices down. If inflation is running below that it can cut rates to leave more money and demand in the economy to help growth and bring inflation back up to target.
This is not a short-term exercise - the Bank will make inflation forecasts covering several years and set its rate policy accordingly. For this reason, there can be times when rates seem high despite inflation being on or near target - it’s what the Bank thinks will happen in the future that matters.
Right now, inflation (Consumer Price Index) is running at 2.6% in the year to November. That’s close to target but the reading has ticked higher in recent months and has come in slightly above where economists have expected. The Bank’s own forecast is for inflation to rise to 2.75% by the second half of 2025 before heading back down again.1
Rates can still fall in that time, but if inflation begins to show up as being higher than the Bank expects then interest rate cuts could be delayed and rates will stay higher for longer.
Growth
Growth in gross domestic product (GDP) is the other major metric that the Bank of England watches closely. When growth is higher this tends to feed through to a higher level of demand in the economy which can often mean upward pressure on inflation. If growth is weak then this tends to mean consumers have less confidence and job security, leading to less spending, lower demand and eventually lower prices.
The growth numbers in 2024 have been weak, with the second half of the year being particularly disappointing. GDP grew by just 0.1%2 in the third quarter of the year and the figure for October - the first month of the fourth quarter - has shown GDP actually shrinking by 0.1% month-on-month3.
This weak growth removes inflationary pressure and means the Bank has more room to cut rates.
Experts views
There is never a shortage of professional voices waiting to give their view on what they think will happen with rates, growth and inflation. Recent estimates for rates include those from the Organisation for Economic Co-operation and Development (OECD), which said this month that it expects UK rates to fall less quickly over the next two years.
The body blamed measures from the recent Autumn Budget that will rapidly increase spending, with tax rises only recouping a fraction of what the government plans to spend and borrowing making up the rest. This will mean markets will expect a higher rate of interest to lend to the government.
Analysts at Goldman Sachs have been more bullish that rates will be cut rapidly next year, forecasting the Bank rate to drop to as low as 2.75% by the end of 2025. In a research note Goldman Sachs said: “Our findings suggest that the Bank rate remains notably restrictive and – together with rapidly falling inflation and dovish MPC commentary – reinforces our view that the Bank of England will ultimately lower rates more than priced.”
Meanwhile, Capital Economics, the economic think tank, have forecast the Bank of England Rate reducing rates to 3.5% by early 2026.
Source:
1Bank of England, 7 November 2024
2ONS, 15 November 2024
3ONS, 13 December 2024
Important information - investors should note that the views expressed may no longer be current and may have already been acted upon. Eligibility to invest in a SIPP or ISA and tax treatment depends on personal circumstances and all tax rules may change in the future. Withdrawals from a SIPP will not normally be possible until you reach age 55 (57 from 2028). This information is not a personal recommendation for any particular investment. If you are unsure about the suitability of an investment you should speak to one of Fidelity’s advisers or an authorised financial adviser of your choice.
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