When will the Bank of England reduce interest rates further?

What is the interest rate today?

The Bank of England (BoE) left interest rates on hold at 4% at its September meeting having cut by 0.25% in August.  

That’s a good deal lower than the peak of 5.25% hit just over a year ago, but it’s not too bad compared with inflation, the latest measure of which is 3.8%. Savers have a fighting chance of preserving the spending power of their money in a competitive bank or building society account. 

For a brief period, it was possible to outpace rises in the cost of living more meaningfully, but with inflation now back on the rise, at least in the short term, it’s more difficult.  

Further cuts to bank rate are expected as inflation comes under closer control, but how much and when is uncertain. It hinges on inflation and other economic data as it emerges over the coming months. 

How do UK interest rates work?

The BoE Monetary Policy Committee (MPC) meets regularly to set the ‘base rate’, a mechanism which influences interest rates on borrowing and savings. The Bank has a mandate to set the rate at an appropriate level to ensure inflation is at, or close to, 2%. This target is thought to represent a happy medium of encouraging growth without risking instability. 

A few years ago, the BoE increased interest rates aggressively in a bid to counter a post-Covid inflation surge. It now faces a new battle: To get inflation sustainably below 2% despite some renewed upward pressure while it gradually reduces rates to help support the economy. 

So far BoE policymakers have stuck to a roughly quarterly rhythm of trimming interest rates from their peak of 5.25% in the first half of 2024. Ongoing guidance of a “gradual and careful” approach indicates an ambition to move lower over time. However, it also keeps the door open to an extended pause, which, given the increasingly inflationary backdrop, appears likely as we head towards the year-end. 

When will the Bank of England reduce interest rates? 

Signs of strain in the UK economy have become hard to ignore. The labour market is softening, with unemployment rising to 4.7% — a four-year high — and hiring activity subdued. Pay growth is also cooling, albeit slowly, potentially easing demand-driven inflationary pressures.  

Ordinarily, a weakening economy and deteriorating jobs market would prompt policymakers to cut rates to support demand. But inflation has reaccelerated through 2025, constraining the BoE’s room to manoeuvre. 

Consumer Prices Inflation (CPI) for August was a chunky 3.8%, and with September’s print expected to be even higher — potentially double the 2% target — the case for holding rates steady will remain strong. September’s CPI will be the figure at hand in the November meeting, and most committee members are likely to favour caution until inflation shows clearer signs of retreat. 

While core goods inflation may be peaking, services could remain sticky due to elevated employment costs. This could keep overall CPI high, even as other components stabilise. Food prices also represent a major worry, rising by 5.1% over the past year, and could continue to drive consumer expectations.      

The Autumn Budget adds a further layer of complexity. Until there’s clarity on the Chancellor’s fiscal plans, MPC members may be reluctant to ease further. That makes a November rate cut unlikely. December’s meeting could be more finely balanced, depending on incoming inflation data and the Budget’s implications for taxation and spending, but it’s likely the next rate cut won’t arrive until 2026. 

What does it mean for savings rates?

Interest rates on easy access accounts have been falling in recent months in response to base rate cuts and the anticipation of further ones. With inflation approaching the 4% mark there’s a significant risk that savers are earning returns that lag price rises, effectively losing them spending power and eroding financial resilience.  

Fortunately, there are still some good, competitive rates available, but it does mean shopping around. A cash platform such as Charles Stanley Direct Cash Savings could assist in getting a competitive deal. For instance, the best available easy access rate at the time of writing is 3.85% AER. 

Savers may also wish to consider fixed term accounts where rates are currently more generous than for easy access – provided the money isn’t required before the end of the term. If base rates are cut further in the coming months the return on a fixed rate account will be protected, whereas rates on easy access account have little chance of improving and could instead drop further. Presently a 12-month fix around the 4.2% level is achievable.

What about tax on savings interest?

Interest on savings, outside of ISAs and over and above certain limits, is taxable. With interest rates having moved higher over the past few years more savers being caught in the tax net. 

Your tax rate on savings interest depends on how much earned income or other non-savings income you have. There’s also a tax-free allowance for savings interest, the personal savings allowance, which means some people don’t pay tax on a limited amount of interest: 

• Basic rate taxpayers can earn £1,000 of interest in the 2025/26 tax year before paying tax
• Higher rate taxpayers have a lower allowance of £500
• Additional rate taxpayers don’t receive a personal savings allowance

It’s also possible to maximise your untaxed interest in savings and investments by using ISA allowances. Plus, if you are a couple, you can maximise use of yours and your partner’s personal savings allowance and, if applicable, income tax personal allowances too. 

Find out more: Tax on savings explained - how much will you pay?
 

A smart way to bag competitive savings deals

Moving your cash around different banks and building societies to get better rates can be a pain, but there is another way. A cash savings platform offers a range of cash saving accounts with different interest rates from a variety of providers all in one place. 

• Manage your savings in ‘marketplace’, moving between accounts with ease. However, if you place money in a fixed term account you won’t be able to switch provider until the term ends.
• Mix and match a range of terms from instant access to five years through one secure account
• A single application, identification check and log in
• A selection of top tier interest rates available from high street and challenger banks
• Minimums starting from just £1