2025 UK interest rate outlook

As expected, the Bank of England’s Monetary Policy Committee (MPC) voted to keep the Bank rate on hold at 4.75% at its final policy meeting of 2024.

In an unexpected twist, however, three of the nine-member committee voted for a 25-basis point (bp) rate cut.

Going into the meeting, the MPC was faced with some additional uncertainty including:

• How UK businesses will respond to the employers’ National Insurance Contribution hikes in April 2025.
• The potential impact of US President-elect Donald Trump’s proposed trade tariffs.

It also had a mixed set of economic data to digest:

• Recent CPI inflation releases which surprised to the upside.
• Unexpectedly strong growth in average private sector weekly earnings.
• GDP and survey outturns which pointed to a loss of momentum in activity.

The minutes of the MPC meeting reveal a surprisingly firm dismissal of the latest earnings figures as simply volatility. Instead, the MPC is relying on other indicators which suggest the labour market is broadly in balance and point to a cooling in planned wage growth in 2025.

For the majority of the MPC, which voted for a steady bank rate, more data was needed to ‘clarify’ the trade-off between hawkish and dovish news.

For the dissenters, heightened medium-term downside risks to inflation won the day and would have warranted moving to a less restrictive policy rate.

Current market pricing envisages two to three rate cuts by the MPC next year, with the first one not coming before May.

We acknowledge that it will take time for the fog of uncertainty to ease, and near-term prospects are for inflation to climb a little higher from current levels.

But if we are correct that the UK will not engage in meaningful retaliatory action against US tariffs, we think the next rate reduction could come sooner, and the extent of easing could go further over 2025 than the market currently factors in.

Therefore, we stand by our (data-dependent) view of four 25 bp rate cuts – one every quarter – to bring rates to 3.75% by year end.

If markets come to reflect this, this could in due course push down on swap rates, and in turn on mortgage rates.

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