How far will interest rates fall?

The Bank of England is now cutting rates. Its Monetary Policy Committee (MPC) reduced rates from 5% to 4.75% in November, the second cut this year.  

The market expects more rate cuts to come, with a poll of economists by Reuters suggesting a 65% chance that rates fall again at the December meeting of the MPC. 

However, the path for rates has been changing, something you can see in the chart below. Rates are not expected to fall as steeply as they were in the summer. The recent Budget included significant spending and borrowing commitments, which have resulted in a moderate increase in market interest rates, and may also be reflected in the path for the official Bank Rate. 

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 and was recorded as being 1.7% (Consumer Price Index) in September down from 11.1% in October 2022. Meanwhile, growth in the economy has slowed, with zero GDP growth reported in July and 0.2% in August. This suggests the ground is set for rates to fall further, although the timing of cuts is uncertain. 

The next central bank meeting is scheduled for 19 December followed by meetings on: 

• 6 February (2025) 
• 21 March (2025) 
• 9 May (2025) 

What are the latest forecasts? 

Economists polled at the start of November predicted a 65% chance of another cut in December. Those odds have shrunk slightly since the Budget. 

The Bank will be wary of cutting rates too quickly. Lowering rates tends to increase demand in the economy which can feed through to higher prices. 

Despite the fact inflation is now comfortably below target at 1.7%, the speed of rate cuts is not expected to be as quick as it was just a few weeks ago. November’s Monetary Policy Report forecasts another rise in inflation to 2.75% - back above target - over the next year. 

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 6 September, 7 October and 6 November.  

The most recent (6 November) implied rate in 18 months' time is now 4.27%. 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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