Bank of England (BoE) Governor Andrew Bailey is confident inflation will fade in 2025, which could mean as many as four interest rate cuts over the year.
Bank of England (BoE) Governor Andrew Bailey is confident inflation will fade in 2025, which could mean as many as four interest rate cuts over the year. Bailey told the Financial Times in December that despite recent higher points, he still expected inflation to return to the Bank’s 2.0% target, creating headroom for four 0.25% rate cuts throughout 2025.
Bailey noted that while several different inflation scenarios were possible, the latest monetary policy report noted that the Bank would pursue a path of “gradual” interest rate reductions. If his forecast proves correct, it would push the Bank Rate down from 4.75% to 3.75% over the next 12 months.
What could this mean for mortgage borrowers?
For homeowners on tracker mortgages, which track the UK Bank Rate, each rate cut will see their mortgage rate reduced. Mortgage holders with a variable rate mortgage can expect their lenders to cut rates more gradually, with cuts likely to vary from lender to lender and based on a number of different criteria aside from Bank Rate decisions.
Anyone with a fixed rate mortgage, but particularly those whose term ends within the next year, will be more hopeful they can refinance at a more comfortable rate. However, it’s worth noting that fixed mortgage rates anticipate interest rate changes, rather than respond to them. This means expected Bank of England rate cuts are already factored into current rate pricing. As a result, the cheapest five-year fixed rates are slightly above 4%, instead of being more closely tied to the Bank Rate. If the market expects rates to drop to 3.75% by the end of 2025, rather than 4.0%, there could be potential for further mortgage rate reductions.
What if the Governor’s predictions fall short?
Andrew Bailey’s statement highlights that the outlook for the UK economy is still uncertain and while inflation should move closer to target, there are many unknowns that could derail the prospect of four rate cuts this year. It’s also worth noting that despite Bailey’s assertions, market expectations for interest rate cuts have been shifting recently.
Before the October Budget, markets expected six to seven rate cuts over the next year, but this dropped to two to three cuts after the Budget, as some measures – including increased borrowing and higher spending commitments – were viewed as inflationary.
Given these dynamics, the future trajectory of interest rates remains hard to predict. That said, further positive comments from Andrew Bailey may encourage a downward trend in rates. For those considering fixed-rate options, acting sooner rather than later may be prudent to secure favourable terms.
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