The governor of the Bank of England, Andrew Bailey, has shared projections indicating the possibility of four interest rate cuts next year. This optimistic forecast comes amidst efforts to bring inflation under control.
The Office for National Statistics (ONS) reported that inflation rose to 2.3 per cent in the 12 months to September, slightly above market expectations. Despite this, Bailey expressed confidence during the Financial Times Global Boardroom conference, asserting that inflation would soon align with the Bank’s 2 per cent target.
Bailey disclosed that the Bank’s central forecast anticipates four quarter-point reductions in interest rates throughout 2025. If this prediction holds true, the base rate would decrease from its current level of 4.75 per cent to 3.75 per cent by the year’s end. This would follow a series of cuts from its peak of 5.25 per cent recorded earlier this year.
Should interest rates drop to 3.75 per cent, this would differ slightly from general market predictions, which currently project a reduction to around 4 per cent by the end of 2025. Bailey’s outlook suggests a potentially faster easing of borrowing costs than many analysts anticipate.
These projected changes could have significant implications for borrowers and savers, as lower interest rates typically reduce borrowing costs while offering less favourable returns on savings. The next year will likely prove pivotal in shaping the UK’s economic trajectory.
What could it mean for mortgage borrowers?Â
Borrowers on tracker mortgages, which are directly linked to the Bank of England base rate, are likely to see immediate benefits with each rate cut. As the base rate drops, their monthly repayments should decrease in line with the changes, providing relief to those navigating high borrowing costs. For borrowers on other variable-rate deals, the picture is less certain. While rate cuts may lead to reductions in their payments, the timing and extent of these changes are at the discretion of individual lenders, who may adjust rates as and when they see fit.
Homeowners whose fixed-rate mortgage deals are set to end in the coming year or the year after may feel cautiously optimistic about refinancing. If the Bank of England’s projections for rate cuts materialise, they could find more affordable options available when the time comes to secure a new deal. This prospect of lower rates may help ease the financial pressure on many households facing renewal in a still-volatile economic environment.
Unlike variable-rate products, fixed-rate mortgage pricing does not react directly to changes in the base rate. Instead, lenders set their rates based on expectations of future rate movements. This forward-looking approach means that any anticipated changes, such as the Bank of England’s forecasted cuts, are often partially factored into current fixed-rate offerings. Borrowers should keep this distinction in mind when exploring mortgage options.
At present, the most competitive five-year fixed-rate mortgage deals are priced just above 4 per cent. This is notably lower than the Bank of England’s current base rate of 4.75 per cent, reflecting market confidence that rates are on a downward trajectory. These figures suggest that some of the anticipated reductions in the base rate have already influenced fixed-rate pricing, offering borrowers a glimpse of potential savings ahead.
However, if market expectations shift further and align with predictions of a base rate dropping to 3.75 per cent by the end of next year—rather than stabilising at 4 per cent—there could still be room for further reductions in fixed mortgage rates. Such a development would be particularly beneficial for those looking to lock in long-term deals, providing a rare opportunity to secure lower repayments in a gradually improving market. As always, speaking with a whole-of-market mortgage broker can help borrowers navigate these changes and identify the best options for their circumstances.
The lowest fixed mortgage rates currently sit above 4 per cent, but brokers suggest this could change if the Bank of England base rate drops to 3.75 per cent as predicted. Chris Sykes, technical manager at Private Finance, believes this is promising news, as a lower base rate could pave the way for sub-4 per cent fixed-rate deals to return. Sykes highlights that this optimistic forecast, coming directly from the Bank of England governor, lends credibility to the potential impact on swap rates, which directly influence mortgage pricing.
Ravesh Patel, director and senior mortgage consultant at Reside Mortgages, agrees that four base rate cuts in 2025 would be a game-changer for borrowers. Patel notes that a 3.75 per cent base rate could encourage lenders to offer fixed-term residential mortgage deals in the 3 to 4 per cent range. However, he also warns that factors like lender competition, swap rate movements, and inflation trends will play a key role in shaping the actual impact on rates.
Buy-to-let landlords, who largely rely on interest-only mortgages, stand to gain the most from rate cuts. There are around 2 million buy-to-let mortgages in the UK, and many landlords are grappling with higher costs due to rising rates. For instance, the average five-year fixed buy-to-let mortgage is now around 5.5 per cent, up from 2 per cent a few years ago. This increase means a landlord with a £200,000 interest-only mortgage now pays £917 a month compared to £334 previously—a substantial jump.
Rate cuts could provide much-needed relief for landlords struggling with these higher costs. Patel explains that lower rates would improve affordability and open up refinancing opportunities for many landlords who currently fail affordability stress tests. However, he cautions that the buy-to-let sector also faces challenges such as stricter regulations, higher operating costs, and evolving tax rules, which may dampen the overall impact of reduced borrowing costs.
While the outlook for mortgage rates appears positive, the potential for sub-4 per cent deals and greater affordability depends on economic stability and market conditions. Borrowers, particularly landlords, will need to carefully evaluate their options as changes unfold in the coming year. Working with a knowledgeable broker can help borrowers navigate this shifting landscape and secure the most competitive deals.
Bad news for savers
While mortgage borrowers may celebrate each interest rate cut from the Bank of England, savers, especially those without a mortgage, may feel quite the opposite. The impact of falling interest rates is bittersweet—what helps reduce borrowing costs for some can erode savings returns for others. Rachel Springall, a finance expert at Moneyfacts, highlights that base rate cuts often deliver a financial blow to savers, particularly those who rely on interest income to supplement their earnings.
Springall explains that high street banks have already begun lowering their savings rates following this year’s base rate reductions. This trend, she warns, is likely to continue, leaving many savers with returns that fail to reflect the current base rate levels. While the average easy access savings account offers just under 3 per cent interest, many of the more attractive deals can be found with challenger banks. Springall encourages savers to explore these alternatives, which are protected in the same way as high street banks, to avoid settling for a subpar deal.
Anna Bowes, co-founder of Savings Champion, also urges caution regarding these projections, emphasising their speculative nature. She notes that economic conditions are highly unpredictable, with upcoming global events such as the US Presidential election and potential trade tariffs likely to affect inflation and financial stability. These uncertainties mean that any predictions about interest rate movements could easily change over the coming months.
Bowes recalls how, prior to the Budget, market expectations were for 6.7 base rate cuts in the next 12 months, but this dropped to just 2.3 cuts after the Budget announcements, which were expected to have an inflationary impact. Following recent developments, the forecast has shifted again, now standing at an average of 3.28 rate cuts. This illustrates how volatile and uncertain rate expectations can be in a rapidly changing economic landscape.
Despite this unpredictability, Bowes advises savers to act proactively. Fixed-rate savings products, while stable, saw slight increases following the Budget but may soon start to decline again in response to the Bank of England’s announcements. For those with cash to set aside, locking in a fixed-rate deal now might prove advantageous before further rate cuts take effect. Savers should remain vigilant, compare options, and make decisions swiftly to maximise their returns amidst these shifting conditions.
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