How far will interest rates fall?

Markets are now pricing in as many as three quarter-point rate cuts by the Bank of England in 2025 following the turmoil triggered by the announcement of US trade tariffs.

The announcement on 2 April of trade tariffs on international partners by US President Trump has pushed expectations of where rates will end up sharply lower. 

As we lay out in the chart below, forward bond prices are now indicating three more quarter-point cuts this year. Market watchers have suggested the first of those could come in May. Beyond that, markets are suggesting rates will continue to fall in 2026, but less quickly, reaching around 3.5% in 18 months.

The Bank’s Monetary Policy Committee (MPC) held interest rates at 4.5% at its latest meeting in March after MPC members voted 8-1 to keep rates on hold. 

This follows its decision to cut rates from 4.75% in February. There have now been three quarter-point cuts to the Bank Rate since the recent peak in August 2024.

Tariffs complicate the picture for interest rates. On the one hand they are likely to be inflationary, making it harder for central banks to lower rates as inflation comes under control. Yet, they are also likely to slow down growth, taking momentum out of economies.

Markets are betting on tariffs prompting central banks to lower rates to ease economic conditions. It remains to be seen how the Bank of England views the potential inflation triggered by trade tariffs.

Meanwhile, the Consumer Price Index measure of inflation rose 2.8% annually in February, down from 3% in January. The Bank of England is now forecasting inflation to hit 3.7% this year before retreating again.

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The next central bank meeting is scheduled for 8 May 2025 followed by meetings on:

• 19 June
• 7 August
• 18 September

What are the latest forecasts? 

Forward bond prices (see below) indicate three more quarter-point cuts this year. Market watchers have suggested the first of those could come in May.

Beyond that, markets are suggesting rates will continue to fall in 2026, but less quickly, reaching around 3.54% in 18 months. These levels are purely indicative - in realty, the Bank tends to move rates in quarter-point increments.

How forward market interest rates have changed 

The path ahead for interest rates, as implied by market prices, has been changing. The chart below shows the implied level of interest rates from the 18 March 2025 (immediately prior to the March rate decision), 19 February 2025 and 4 April 2025. 

The most recent reading for 4 April (the yellow line) shows rates falling in the short term but then levelling out. It indicates rates will dip below 4% within 9 months. Rates are then expected to flatten out, reaching 3.54% after 18 months. This is slightly below the level expected a month ago.

It suggests markets believe rates will continue to fall for the next year, but that it will be difficult for the Bank of England to then bring rates back to the levels seen pre-2022 when the current round of hikes began.

The Bank operates in quarter point changes so these predictions are only indicative. 

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