Interest rates expected to fall to 4.5%

The Bank of England is expected to cut interest rates from 4.75 per cent to 4.5 per cent when its Monetary Policy Committee (MPC) meets on Thursday.

The MPC can vote on whether to increase or cut the base rate, but most major forecasters expect it will cut it by 0.25 percentage points.

It is the first meeting of the year after the Bank held interest rates at its last meeting in December, with six to three MPC members voting to do so, citing sticky inflation.

The Bank generally keeps interest rates high to tackle high inflation and cuts them as inflation gets towards its 2 per cent target.

Inflation fell to 2.5 per cent in December – down from November’s level of 2.6 per cent.

But now, with inflation likely to increase throughout the year, it looks as if there will be less cuts to the base rate than previously predicted.

Rob Wood, chief UK economist at Pantheon Macroeconomics, believes eight of the nine members of the MPC will vote for a cut, with just one dissenting.

Mr Wood told The i Paper: “After disappointing growth and employment in November, and inflation slowed in December, I expect there to be a cut.

“The MPC’s guidance will balance weaker growth forecasts against inflation likely jumping above 3% this year.

“We think the MPC will agree with a market curve that prices around three rate cuts in 2025.”

Laith Khalaf, head of investment analysis at AJ Bell, said: “This will be the first interest rate decision from the Bank of England in 2025, and chances are we’re going to start the year off with a cut to base rate.

“Economic signals have been weak, and services inflation has fallen back substantially since the last meeting of the MPC in December, at which point three members of the committee already voted for a cut to 4.5%.

“The market is currently pricing in a 90% chance of a rate cut and that feels about right. There’s the possibility of a surprise, but a small one.”

There is a significant divergence of views on how many rate cuts there will be from the Bank this year.

Morgan Stanley thinks five, Golman Sachs four, and the market is pricing in two to three.

Mr Khalaf said: “This perhaps speaks to a volatile economic environment, with a new Labour Government laying out a raft of policies designed to boost growth, while UK companies are yet to fully adjust to the policies announced in the Budget.

“Clearly the business reaction to a higher national living wage and a hike in national insurance will have a considerable bearing on economic growth, employment, and inflation.

“We can also safely say there’s a fair amount of uncertainty generated by the election of Donald Trump as US president, which potentially has huge ramifications for economics across the globe, including our own.”

However, some believe there may be a hold.

Professor Chris Martin, an economist in the department of economics at the University of Bath, said: “Two factors might point to a hold on rates for now. The first is an increase in real wages, which, although welcome, may put upward pressure on inflation; the Bank may decide to wait until real wage growth moderates before cutting rates.

“The second is the highly uncertain international environment, especially in the US. As the recent temporary rise in government bond rates shows, financial markets in the UK tend to follow the US.

“The prospect of widespread tariffs, coupled with a desire to be seen to resist presidential calls for lower rates, may lead the US Fed [Federal Reserve] to not cut rates for a while.

“If so, this may well slow the speed of rate cuts here. I think the MPC should cut rates, either this month or next; but on balance, I don’t expect a cut at the next meeting.”

What does this mean for your money

Mortgages

Those on tracker and standard variable mortgages, which tend to follow the base rate, will come down automatically in response to any cut.

However, those on fixed rates, which are typically cheaper, will have to wait for their deal to end before renewing on to another rate.

Around 81 per cent of people are on fixed-rate deals, where the interest rate is locked for a set period of time.

Currently, the market is fluctuating with lenders both increasing some of their rates and cutting others at the same time.

Depending on when you locked into a fixed rate, you are likely to be paying a higher rate when you come to renew than you were before.

Myron Jobson, senior personal finance analyst at Interactive Investor, said: “Even a small reduction in borrowing costs could provide some much-needed financial relief.

“However, the extent of this benefit depends on how quickly and to what degree lenders pass on the cuts to consumers. Fixed-rate mortgage holders won’t see an immediate impact, but if expectations of lower rates persist, we could see better deals emerge for new borrowers and those looking to remortgage.”

But Simon Gerrard, managing director of Martyn Gerrard estate agents, added: “Any savings from the base rate being cut will likely be offset by the ill-advised decision to end stamp duty relief in April, which will make all home purchases more expensive, especially for first-time buyers.”

Savings

Although savings rates tend to come down when interest rates do, there are still many providers offering deals way above the current inflation rate of 2.5 per cent.

It is important to use comparison sites to find out if you could get better returns by moving to another provider with challenger banks often offering more competitive rates than high street alternatives.

Mr Jobson said: “Those who can afford to lock away their money for five years or more should consider investing.

“While investing comes with risks, history shows that the stock market tends to outperform cash over the long term. A well-diversified portfolio can help spread risk, and by drip-feeding money in regularly, investors can smooth out market ups and downs.”

Pensions

A cut to interest rates usually means a drop in annuity rates, however, much like savings rates, there are still many good deals to be had on retirement plans.

Helen Morrissey, head of retirement analysis at Hargreaves Lansdown, said: “Annuities are riding high and not even the prospect of an impending rate cut seems able to burst their bubble.

“The latest data from HL’s annuity search engine shows a 65-year-old with a £100,000 pension can get up to £7,492 per year from a single life level annuity with a five-year guarantee. This is just under the all-time highs experienced in the aftermath of the mini-Budget and will be enough to continue to pique the interest of anyone looking to secure a guaranteed income in retirement.”