Key Takeaways
- Interest rates expected to be cut to 4% by Bank of England, after cuts in February and May.
- Market uncertainty remains about the terminal or neutral rate for UK.
- After August, markets still expect the Bank of England to cut interest rates next in November.
Markets still anticipate a rate cut from the Bank of England on Aug. 7, despite UK inflation remaining above target.
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.
“Inflation in the UK continues to run above the BOE’s 2% target. Still, we think the 25-basis-point cut priced in by money markets remains a plausible outcome,” says Morningstar international economist Grant Slade.
“The recent weakening of labor market conditions is consistent with a disinflationary process that remains underway. Indeed, the modest slack now building in the labor market offers the BOE enhanced scope to gradually lower interest rates.”
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%—1 percentage point lower than at the start of the year. This would chime with the quarterly cadence of rate cuts that many expected in January.
According to interest rate swaps data, there is a 93.6% likelihood of a cut on Aug. 7. The data suggests there is a 59.4% chance of a fourth rate cut in November. At the moment, the data only shows projections out to June 2026. The most likely time for a rate cut is February, the data suggests, but the consensus is not yet in majority territory.
Where Next for UK Interest Rates?
High levels of uncertainty and unfavorable economic conditions are currently gripping the UK economy.
Chancellor Rachel Reeves says the UK’s gross domestic product growth figures are “disappointing”; unemployment is creeping upward again; and there is evidence that the UK housing market is slowing.
Are rate cuts now needed to stimulate activity in the real economy? After all, 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. Much of the worst pressure has eased. Nevertheless, the bank remains cautious with inflation above target: CPI rose by 3.6% year over year in June, with July figures due on Aug. 20.
“If those pressures continue to ease, we should be able to reduce interest rates further over time, but we can’t say precisely when or by how much,” it said in May.
“We will monitor the British economy and global developments (such as changes in trade policies) very closely and take a gradual and careful approach to reducing rates further.”
What Do Voting Patterns Tell Us About Interest Rates?
Interest rates are gradually falling in the UK, and several members of the Bank of England’s monetary policy committee have made no secret that they wish interest rates to be even lower than they currently are. At the MPC’s last meeting in June, the bank voted to hold rates.
At the MPC’s last meeting in June, the vote went 6-3 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 that the institution was cutting rates too quickly.
As the next MPC decision looms, markets will be looking closely to see the spread of opinion on the committee. In a note published on July 31, analysts at Bank of America predicted a majority vote for a 25-basis-point cut, with two votes for a hold and two for a 50-basis-point cut.
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 Organization for Economic Cooperation and Development, 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. The European Central Bank has already cut its key interest rate in June to 2% amid below-target inflation on the continent, while the US Federal Reserve is yet to cut rates so far this year despite mounting pressure from President Donald Trump.
When Are the Bank of England’s Next Interest Rate Decisions in 2025?
Only four Bank of England meetings remain in 2025. The interest rate decisions will be announced on the following dates:
- Aug. 7
- Sept. 18
- Nov. 6
- Dec. 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.
