Will interest rates fall further?

The Bank of England is expected to hold interest rates on Thursday, as it seeks to tackle inflation, which remains well above above its 2% target.

The Bank cut interest rates to 4% in August, taking the cost of borrowing to the lowest level for more than two years, but the reduction was only agreed after an unprecedented second vote by policymakers.

Interest rates affect mortgage, credit card and savings rates for millions of people.

An interest rate tells you how much it costs to borrow money, or the reward for saving it.

The Bank of England’s base rate is what it charges other banks and building societies to borrow money.

That influences what they charge their own customers for loans such as mortgages as well as the interest rate they pay on savings.

The Bank moves rates up and down in order to keep UK inflation – the rate at which prices are increasing – at or near 2%.

When inflation is above that target, the Bank can decide to put rates up. The idea is that this encourages people to spend less, reducing demand for goods and services and limiting price rises.

However, in recent months inflation has remained above the Bank’s target at the same time as the economy has remained relatively flat and the jobs market has softened, which makes its decision harder.

The Bank of England’s base rate reached a recent high of 5.25% in 2023, but five cuts since August 2024 have brought it down to 4%.

After the latest cut, Bank of England governor Andrew Bailey said that although rates remained on a downward path, future cuts would be made gradually and carefully.

Although some analysts still think there could be one further cut before the end of the year, it is not expected to come at Thursday’s meeting.

In August, the Bank’s nine-member monetary policy committee (MPC) voted 5-4 to cut rates by a quarter percentage point.

It followed a never-before-seen second vote, after one economist had argued for a larger cut of half a percentage point.

This suggests future interest rate decisions are likely to be finely balanced.

At the time, the Bank said it expected inflation to peak at 4% in September, which might allow space for a further cut.

Earlier in July, Mr Bailey had said the Bank was prepared to make larger cuts if the job market showed signs of slowing down.

Since then, annual growth in average regular earnings, excluding bonuses, dropped to 4.8% in the three months to July, down from 5% in the previous three months and the lowest since May 2022.

However, the Bank also has to consider the wider global economy.

Mr Bailey has repeatedly warned about the unpredictable impact of US tariffs, and conflict in Israel and Ukraine has also created uncertainty.

Announcements in the Budget on 26 November could also influence the Bank’s decision.

Mortgages

Just under a third of households have a mortgage, according to the government’s English Housing Survey.

About 600,000 homeowners have a mortgage that “tracks” the Bank of England’s rate.

But the vast majority of mortgage customers have fixed-rate deals. While their monthly payments aren’t immediately affected by a rate change, future deals are.

Mortgage rates are still much higher than they have been for much of the past decade.

As of 20 August, the average two-year fixed mortgage rate was 4.98%, according to financial information company Moneyfacts, and a five-year deal was 5%. The average two-year tracker was 4.67%.

This means many homebuyers and those remortgaging are having to pay a lot more than if they had borrowed the same amount a few years ago.

About 800,000 fixed-rate mortgages with an interest rate of 3% or below are expected to expire every year, on average, until the end of 2027. Borrowing costs for customers coming off those deals are expected to rise sharply.

You can see how your mortgage may be affected by future interest rate changes by using our calculator:

Credit cards and loans

Bank of England interest rates also influence the amount charged on credit cards, bank loans and car loans.

Lenders can decide to reduce their own interest rates if Bank cuts make borrowing costs cheaper.

However, this tends to happen very slowly.

Savings

The Bank base rate also affects how much savers earn on their money.

A falling base rate is likely to mean a reduction in the returns offered to savers by banks and building societies.

The current average rate for an easy access savings account is 2.64%, according to Moneyfacts.

Any further cut in rates could particularly affect those who rely on the interest from their savings to top up their income.