Markets expect base rate to be 4.25% by 2025 as Bank of England says inflation could fall to 2% target within months

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The Bank of England’s Monetary Policy Committee (MPC) voted by a majority of 6–3 to maintain the base rate at 5.25%.

Two members preferred to increase the rate by 0.25 percentage points to 5.5%, while one preferred to reduce it by 0.25 percentage points.

According to Arbuthnot Latham, the money markets are now forecasting the Bank will make an initial rate cut in June and drop rates to around 4.25% by year-end. It says: "This will be data-dependent, with underlying inflationary pressures still evident and the jobs market still relatively robust.

"The Bank of England estimates a third of tightening to date has yet to impact the economy, whilst the budget in March only adds to the uncertainty."

Inflationary pressures are abating across the euro area and the United States

The Bank of England says since the MPC’s previous meeting, global GDP growth has remained subdued, although activity continues to be stronger in the United States. Inflationary pressures are abating across the euro area and the United States.

Wholesale energy prices have fallen significantly, although "material risks remain from developments in the Middle East and from disruption to shipping through the Red Sea".

It adds that following recent weakness, GDP growth is expected to pick up gradually during the forecast period, largely reflecting a waning drag on the growth rate from past increases in Base Rate. Business surveys are consistent with an improving outlook for activity in the near term.

At its latest meeting, the MPC discussed cutting rates, with inflation - the pace of price rises - set to fall quickly this year. The “market-implied path for Bank Rate that declines from 5.25% to around 3.25% by 2027 Q1, almost one percentage point lower on average than in the November Report.”

The bank added: "Inflation could fall to our 2% target within a few months before rising slightly again.
The speed of price rises (inflation) is slowing. Inflation has fallen from 11% in 2022 to 4% in December 2023.

Petrol and utility prices have fallen over the past year, and some other prices are now rising much more slowly, including food prices. The Bank expects inflation to fall further by the end of this year, but "there could be some bumps along the way between now and then."

Andrew Bailey, Governor of the Bank of England, says: “The decisions we have taken on interest rates are helping to bring inflation down. We have held rates, and even though there has been good news on inflation, we need to be sure it falls back to our 2% target and stays there sustainably.

"That means we need to see more evidence that inflation will fall further and stay low before we are able to lower interest rates. Getting inflation down and keeping it there is the best thing we can do for households and businesses up and down the country.”

Capital Economics expects the base rate will be at 3% next year

Paul Dales, chief UK economist at Capital Economics, told the BBC that the Bank "sent some soft signals that the next [interest rate] move will be a cut, but it pushed back more strongly against the idea that rates will be cut soon or far". However, Mr Dales added he expected a faster fall in inflation and predicted the Bank would "change its tune in the coming months".

"A rate cut in June is still possible and we think rates will end 2025 at 3%," he added.

Will fixed rates come down if the base rate hits 3% next year?

Lenders use various sources to fund mortgages although they typically buy money using SWAP rate pricing and then issue mortgages. Pricing is not directly linked to the Bank of England base rate.

Some lenders use saver funds, and there has been a strong reliance on government-backed mortgage schemes previously, which lenders are repaying.

While logic suggests that the rate will get cheaper if and when the base rate comes down, there is no guarantee. More lenders are telling us the borrowers are opting for shorter-term fixes and tracker rates as they predict rates will be lower in a few year's time.

Trinity Financial's brokers recently met with a senior manager at a large building society, and he was not confident mortgage rates would be cheaper any time soon.

Sources used: BBC, Bank of England, Arbuthnot Latham Private Bank.

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The information contained within was correct at the time of publication but is subject to change.

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