How far will interest rates fall?

The Bank of England has begun cutting rates, but only gradually. Its Monetary Policy Committee (MPC) voted to hold rates at 4.75% in December 2024 after cutting in November.

The outlook for rates has changed meaningfully over the past few weeks with markets pricing in roughly one fewer rate cuts over the next 12 months in December than had been the case in November. Inflation has proved more difficult to shift, with the official rate creeping back to 2.6% and ending the year higher than the Bank had been forecasting. Further increases are expected in the first half of 2025. 

The Bank aims to keep inflation close to a target level of 2%. To achieve that, it has been applying higher interest rates to slow the economy down and bring inflation down from the very high levels seen in the past two years. 

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Inflation has fallen a long way from its high of 11.1% in October 2022. Meanwhile, growth is running out of steam with the economy unexpectedly shrinking in October. That’s a difficult mix for policymakers - both at the Bank and in Downing Street, where Rachel Reeves has pinned her plans on a recovery to widen the tax base next year and help pay for the government’s huge spending injection. Interest rates staying higher for longer will make that harder, as well as increasing the cost for the Treasury to borrow money.   

The next central bank meeting is scheduled for 6 February 2025 followed by meetings on: 

• 21 March 2025
• 9 May 2025
• 19 June 2025

What are the latest forecasts? 

The speed of rate cuts is not expected to be as quick as was the case earlier in 2024.

November’s Monetary Policy Report forecast another rise in inflation to 2.75% - back above target - over the next year. Higher-than-expected inflation readings since that report suggest the Bank may have been too optimistic, and that rates may have to stay higher for longer.

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 December, 18 November and 18 October.    

The most recent (18 December) implied rate in 18 months' time is now 4.16%. The path for interest rate falls has been getting less steep, indicating that the market does not expect rate cuts to come through as quickly as they did a couple of months ago.   

The Bank operates in quarter point changes so this rate is only indicative. 

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