Introduction to UK Interest Rates
The UK economy is currently facing a weak period, with a slowing housing market and rising employment. Despite UK inflation remaining above target, markets still anticipate a rate cut from the Bank of England. A 25 basis point cut would mark the third time the Bank of England has lowered rates in 2025 and would decrease the base rate to 4% amid stagnating economic growth, rising unemployment, a slowing housing market, and the ongoing global economic fallout from US tariffs.
Current State of the UK Economy
High levels of uncertainty and unfavorable economic conditions are currently gripping the UK economy. The Chancellor, Rachel Reeves, says the UK’s gross domestic product (GDP) growth figures are "disappointing"; unemployment is creeping upwards again; and there is evidence the UK housing market is slowing. Inflation has fallen from highs of 11.1% in October 2022 to below the Bank’s 2% target in May 2024, before rebounding as energy costs and global economic dislocation from the tariffs drove prices higher once more.
Interest Rate Cuts
Interest rates are gradually falling in the UK, and several members of the Bank of England’s monetary policy committee (MPC) have made no secret of the fact they wish interest rates to be even lower than they currently are. At the MPC’s last meeting in June, the vote went six-three in favor of a rate hold. MPC members Swati Dhingra, Dave Ramsden, and Alan Taylor all voted against. All three economists have been vocal in their support for monetary easing. Others feel strongly to the contrary. In May, Huw Pill, the Bank’s chief economist, warned the institution was cutting rates too quickly.
Market Expectations
Markets still expect the next rate cut in November. According to interest rate swaps data, there is a 93.6% likelihood of a cut on August 7. The data suggests there is a 59.4% chance of a fourth rate cut in November. Financial markets also still expect a fourth and final rate cut before the end of the year, which would leave the base rate at 3.75% – one percentage point lower than at the start of the year.
The Terminal Rate
In terms of where interest rates end up in the longer term, there is little certainty over the "terminal rate" – the "neutral" interest rate that is neither expansionary or contractionary for the economy. Other bodies, like the OECD, have previously said they expect rates to settle at 3.5% by 2026. In June, Goldman Sachs Asset Management predicted a terminal rate of 3.25%. That uncertainty comes as other central banks make their own decisions about interest rates.
Upcoming Interest Rate Decisions
Only three Bank of England meetings remain in 2025: August 7, September 18, and November 16, and December 18. When the MPC meets in November, we will also get a look at its final quarterly monetary policy report for 2025, indicating its outlook for 2026 and beyond.
Conclusion
In conclusion, the UK economy is facing a challenging period, with a slowing housing market and rising employment. Despite UK inflation remaining above target, markets still anticipate a rate cut from the Bank of England. The upcoming interest rate decisions will be closely watched, and the market expectations suggest a high likelihood of a rate cut in August and November. The uncertainty surrounding the terminal rate and the ongoing global economic fallout from US tariffs will continue to impact the UK economy, making it essential to monitor the situation closely.
