When will UK interest rates fall further in 2025?

In a widely expected move, The Bank of England (BoE) held interest rates at 4.75% at its final meeting of 2024.

The stubbornness of services inflation driven by strong wage rises was enough to stay the hand of most of the policymakers that make up the BoE’s voting committee. The Consumer Prices Index rose by 2.6% on an annual basis in November, up from 2.3% in October and 1.7% in September, with higher energy costs mostly to blame.

The target for inflation is 2.0% and the BoE is tasked with setting interest rates to best meet that.

The bank is also keeping a careful eye on wage rises, an important driver of inflation. Growth in earners accelerated to 5.2% between August and October from 4.8% in the previous report. Wages are another important driver of inflation.

How businesses respond to the Budget will be a critical factor for inflation

With wage inflation remaining high, feeding into services costs, and a reacceleration of energy prices, the BoE is wary of cutting interest rates too much too soon, especially now fiscal policies revealed in the Budget could add fuel to the inflationary fire into the New Year.

There’s a lot to monitor for BoE economists, not least the trade-offs businesses will be making between growth, employment, and pricing in response to the Budget.

The additional costs for employers in terms of higher national insurance and minimum wages looks set to reinforce the trend of escalating costs in the services sector. Although employers might take some of the hit with lower corporate margins, much of the impact could take the form of higher consumer prices.

The BoE will be carefully monitoring the corporate response, which could vary across different industries and individual businesses. Given the uncertainty it’s no surprise it wants to place more emphasis on a gradual approach focused on developing data rather than make any assumptions.

Further afield, there are inflationary concerns surrounding what Donald Trump’s reprise as US President might mean for global supply chains. Should he look to expand his tariff approach there could be a significant inflationary impact on global trade.

Interest rates will continue to fall but the trajectory will be shallow

Previously, Governor Bailey stated that “interest rates are going to come down. I’m optimistic on that front”. This much still holds true, but when and by how much is very much in doubt.

An unusually broad spectrum of outcomes are in play, presenting a quandary for the BoE. On the one hand big government spending plans and additional costs for businesses could stoke inflationary pressures. On the other, it must be alert to the Budget weighing on confidence and dampening consumer and business activity.

As things stand there are too few signs of structural inflation problems receding for it to make sizable or rapid cuts to interest rates. Elevated wages numbers and stubborn services inflation highlight the challenges of bottling up the inflation genie for good. Combined with the uncertain Budget impact yet to play out, it’s going to be hard for policymakers to be convinced to cut rates aggressively.

It remains highly likely the bank will continue to follow its data dependent path and cut rates in the New Year, perhaps as early as its first meeting in February. Three of the nine MPC members voted for a rate cut in December and the next vote could be even more tightly balanced. Even so, we expect only a gradual withdrawal of more restrictive policy over the course of 2025.

What can we expect for mortgages and savings rates in 2025?

Mortgage rates are now past their peak, but remain much higher than the levels enjoyed for much of the past decade. There is a little room for the current 5%-plus average rates to come down if interest rate expectations subside, but with a gradual pace of BoE rate reductions already priced in the dial may not move much for the time being.

In the savings market several providers have pulled their top deals over the past few months as interest rates have fallen. It may be an opportune time to consider fixed rates if you have money you are willing to forego access to for a period. This could allow you to lock in higher rates for longer. An active approach using a savings platform such as Charles Stanley Direct Cash Savings can help make the most of your money.