Bank of England signals slower path for rate cuts amid inflationary concerns

UK interest rates may decline more slowly than anticipated following the Bank of England’s forecast of a gradual rise in inflation due to recent Budget measures.

The Bank recently reduced interest rates from 5% to 4.75% as expected, but noted that new Budget spending, while initially boosting growth, could also accelerate price increases due to initiatives like the cap on bus fares and VAT on private school fees.

Bank Governor Andrew Bailey suggested rates are likely to “continue to fall gradually,” though warned against lowering them “too quickly or by too much” due to both global and domestic economic uncertainties. Investors now predict no further cuts this year, with rates likely remaining steady until at least December.

Capital Economics’ Paul Dales now expects rates to decrease to 3.5% by early 2026, a more conservative forecast than his previous 3% projection. Although inflation briefly dropped below the Bank’s 2% target in September, recent energy price hikes mean it is expected to rise again and could stabilize at 2% by 2027, rather than 2026 as previously anticipated.

The Monetary Policy Committee voted 8-1 in favour of the recent rate cut, with Catherine Mann opting to hold rates steady, citing inflationary pressures from Budget policies. This cautious approach may signal a temporary pause in further cuts.

According to Sarah Coles, head of personal finance at Hargreaves Lansdown, concerns over inflation could stall further rate reductions, citing the Budget’s additional borrowing and employer National Insurance increases. Coles noted that while this pause could benefit savers and annuity seekers, mortgage borrowers may not see immediate relief. Though over a million borrowers with tracker and variable-rate mortgages will likely benefit from reduced monthly repayments, average fixed mortgage rates remain high at around 5.4% for two-year deals and 5.11% for five-year plans. Meanwhile, savers may see reduced returns as banks adjust rates on savings accounts, currently averaging around 3% for easy access accounts.