When will interest rates come down?

The Bank of England raised interest rates 14 times between December 2021 and August 2023, as part of an effort to tackle soaring inflation.

So as the rate of price increases has moderated, members of the Bank’s Monetary Policy Committee (MPC) have changed course, and recently opted to keep interest rates on hold at 5.25 per cent for the fifth time in a row.

The debate has now turned from how high interest rates will go, but to how quickly they will come down, especially as they’re currently at a 16-year high.

Andrew Bailey, Governor of the Bank of England, has acknowledged this discussion, stating that rate cuts could actually be on the way before inflation reaches the Bank’s target of two per cent.

Speaking to BBC News, he said: “We don’t have to actually get inflation all the way back to target… to cut rates for instance. What we have to do is be convinced that it is going there.

“We should act ahead of time in that sense because we have to be forward looking.”

However, Mr Bailey would not be drawn on either when interest rates might come down or how much they could be cut by.

“We do need to see further progress,” he continued.

“But I do want to give this message very strongly. We have had very encouraging and good news, so I think you know we can say – we are on the way.”

What do analysts think?

Market analysts, observers and commentators are largely agreed that interest rates will come down before the end of the year, but split on exactly when this will be.

Ruth Gregory, Deputy Chief UK economist at Capital Economics, believes that inflation will fall “further and faster” than the Bank of England is expecting over the next few months.

“That’s why we think a rate cut in June is possible and why we think rates will fall to three per cent in 2025 rather than to 3.75 to four per cent as priced into the market.”

By contrast, Marion Amiot, senior European economist at S&P Global Ratings, told Reuters that it is expecting the first rate cut to come in August.

“The Bank of England will need to see a lot more moderation in wages and services prices before it starts cutting rates,” she said.

Gabriella Dickens, G7 economist at AXA Investment Managers, was somewhere in between the two positions, saying: “A decision of when to ease will be finely balanced between June and August.

“But on balance, we now see the first move as more likely in June. We continue to expect two further 25 basis point cuts in November and December.”

Colin Asher, Senior Economist at Mizuho Bank, adds that a rate cut in May “seems off the table”, stating that while June is possible, August is still the “most likely” date.

Meanwhile, the Bank of England’s wider strategy has been criticised by Carsten Jung, Senior Economist at the IPPR, who said the MPC has “tightened the screws too much, which is squeezing much-needed future growth”.

“Inflation is coming down more quickly than many predicted just a few months ago,” he said. “This is largely due to global supply chains recovering and energy costs falling. But also domestic price pressures are falling quicker than the Bank had anticipated.

“The Bank should thus cut rates more quickly than its current plans.”

Suren Thiru, economics director at ICAEW, added that while the cycle of hiking interest rates is “firmly in the rear-view mirror, the long delay between tightening policy and its impact on the wider economy means that the heavy toll of 14 rate rises has yet to fully crystalise”.

“The Bank of England remains overly cautious on the prospect of rate cuts given the startling inflation slowdown and an economy in recession, increasing the risk they prolong our economic struggles by keeping policy too tight for too long,” he commented.

Amid this uncertainty, it’s important that clients keep a sharp eye on their savings and on the interest rates they are receiving.

It goes without saying that we are always here if you need any help or advice on savings rates, or any other aspect of your financial planning, and that we will always check the savings rates our clients are receiving as part of our regular review process.