What's the possible future direction for interest rates, according to SIMON LAMBERT?
Headline: U.S. and U.K. Monetary Policy in Question: The Future of Interest Rates
After the recent 0.25% Bank of England base rate cut, speculation swirls about the potential future destination of interest rates in these troubling economic times.
Predictions have taken a wild ride since Donald Trump launched his trade war frenzy, transforming initial predictions from minimal rate cut expectations to the potential for substantial rate drops. We find ourselves now discussing rates dropping because of Trump, not despite him.
Navigating the choppy waters of monetary policy is a nightmare for even the stiffest of economists. The Federal Reserve (Fed) in the U.S. appears to be grappling with a tough balancing act between the anticipated inflation stirred up by Trump's policies and the newly created tariff-induced inflation.
Last night, the Fed elected to hold rates steady in a range between 4.25% and 4.5%.
Unfortunately, the Bank of England isn't faring much better, faced with Britain's sticky inflation and slow growth. The Bank of England continues to view these economic woes primarily as temporary setbacks, while the UK's weak productivity is perceived as a more persistent issue.
The Bank of England's Monetary Policy Committee (MPC) recently slashed the base rate by 0.25%, nudging it down to 4.25% as of May 7, 2025. However, two of the MPC members disagreed on the magnitude of the reduction and advocated for a more aggressive cut of 0.5%. Ed Monk, Chief Economist at Fidelity, commented that this notable dissent indicates the momentum for further rate reductions is rapidly growing.
Disruption to global trade and business sentiment due to U.S. tariffs and trade wars is causing headaches for the Bank of England, adding to the UK economy's already substantial problems.
Weak data concerning the crucial services sector and a drop in consumer confidence has strengthened the belief among analysts that additional rate cuts would be imminent.
But just how far will the Bank of England go?
Where do we go from here?
Barclays schemes to implement an additional three rate cuts in this cycle, aiming to take the base rate down to 3.5%.
Marion Amiot, Chief UK Economist at S&P Global, echoes this prediction, suggesting, "With inflation set to rebound in the April release, the Bank will monitor closely how this affects firms' pricing and employment decisions, as well as the aftermath of the global trade wars on UK economic activity." Amiot further explains, "We expect only a gradual rate cut cycle, with one cut per quarter until Q1 2026."
That equates to another three rate cuts by the end of March 2026, taking the base rate down to 3.5%. This rapid turnaround from minimal rate cut expectations earlier this year is significant but still leaves us far from the record lows experienced in recent years.
There may be wishful thinking that the world-shaking antics of Trump might tank interest rates even further, but those in central banking circles are cautious due to lingering symptoms of the hangover caused by super-low rates distorting markets.
However, these predictions still face challenges. A string of poor inflation data could shift the status quo on its head. Or, economic growth might right itself, despite the attempts of Labour to chill business and consumer sentiment.
Good news for mortgage borrowers is that mortgage rates are heading southward at a jaw-dropping pace. Lenders, enamored with strong balance sheets, robust profits, and an odd sense of optimism in the face of UK economic woes, are eager to offer deals. This boom in mortgage lending has managed to keep the interest rate bubble from bursting.
Whether you're a mortgage borrower or not, it's crucial to understand that interest rate forecasts aren't always accurate. Instead, make decisions based on your personal financial situation and the deals at hand rather than placing all your hope in a particular prediction.
Savers can still find deals offering fixed rates of about 4.5% for one to five years or easy access cash Isa rates of 5%. But don't expect these deals to stick around for long—scour our top savings rate tables to snag the best deals while they last.
Stay tuned for updates on my remortgaging journey, and remember: the future of interest rates remains a fickle beast, often defying experts' predictions.
- Barclays anticipates an additional three rate cuts, aiming to reduce the base rate to 3.5%.
- Marion Amiot, Chief UK Economist at S&P Global, also predicts three more rate cuts by the end of March 2026, taking the base rate to 3.5%.
- Good news for mortgage borrowers is that mortgage rates are falling at a rapid pace, with lenders offering deals despite economic woes.
- Savers can still find fixed-rate deals of about 4.5% for one to five years or easy access cash Isa rates of 5%.
- Making decisions based on personal financial situation and available deals is more important than relying solely on interest rate forecasts.
