Interest rates were cut four times in 2025 with the Bank of England reducing rates from 4.75 per cent to 3.75 per cent. The last reduction in December 2025 was widely anticipated given recent weak economic data to help reassure the Bank of England with the Bank expected to take action against sluggish growth and rising unemployment.

However, it was a tightly contested Monetary Policy Committee vote that ended 5-4, with four members opting to keep rates on hold.The next decision will take place on 5 February, with the majority of analysts now expecting interest rates to be cut one or two more times this year.

 What next for interest rates?

The expectation is that interest rates will continue to fall in 2026 given that UK inflation is predicted to ease. The Bank of England uses interest rate rises as a lever to curb borrowing and spending when inflation gets too high, so when inflation is falling, this gives it headroom to reduce rates. 

The UK Consumer Price Index - CPI - is expected to average about 2.5 per cent in 2026, according to the Office for Budget Responsibility (OBR), before returning to the Bank’s 2 per cent target in 2027. The central bank will also be keeping a close eye on economic growth and unemployment this year. 

When growth is sluggish and unemployment high, the bank can use interest rate cuts to encourage investment and hiring, as it makes borrowing - and therefore the cost of doing business - cheaper.

Unemployment is proving concerning. The latest data from the Office for National Statistics (ONS) shows unemployment has risen from 4.1 per cent in August 2024 to 5.1 per cent as of October 2025, the sharpest rise in joblessness in several years.

Financial markets are now forecasting the central bank will cut rates once or twice this year to either 3.25 per cent or 3.5 per cent. There are some forecasts that suggest interest rates will fall further. Economists at Morgan Stanley and Capital Economics forecast that interest rates will fall to 3 per cent by the end of 2026.

The base rate and the Bank of England 

The Bank of England moves what is officially known as bank rate but more commonly called base rate to try to control inflation.

Base rate is the single most important interest rate in the UK. It determines the interest rate the Bank of England pays to commercial banks that hold money with it and therefore influences the rates those banks charge people to borrow money or pay on their savings. 

The theory is that raising interest rates lifts the cost of borrowing for individuals and businesses and thus reduces demand for it, slowing the flow of new money into the economy and applying the brakes.

In contrast, cutting interest rates lowers the cost of mortgage rates and other borrowing and increases demand, pushing the accelerator on the economy. 

The MPC sets interest rates to try to keep consumer prices inflation (CPI) at the Bank and Government's 2 per cent target.

What's happened to inflation and interest rates?

Higher than expected inflation could result in MPC members refraining from rate cuts in the future. A major inflation spike over recent years saw CPI rocket into double-digit territory, driven by the aftermath of the disruptive Covid lockdowns combined with an energy price crisis triggered by Russia's invasion of Ukraine.

This saw the Bank of England raise base rate rapidly from its record low of 0.1 per cent, reached during the Covid pandemic years. The first move up to 0.25 per cent came in December 2021 and a sharp series of rises from the MPC followed, driving base rate all the way up to 5.25 per cent in August 2023. 

Rates were then held at 5.25% until August 2024 until they were gradually cut over the next 12 months to 4% and ending 2025 at 3.75%.

Inflation was up 3.2 per cent in the 12 months to November, down from levels recorded in previous months. While it still sits higher than the Bank of England’s 2 per cent target, the Office for Budget Responsibility (OBR) expects inflation will fall progressively to the Bank of England’s 2 per cent target by early 2027. 

What a base rate cut would mean for savings and mortgage rates

Many people assume that savings rates and mortgage rates are directly linked to the Bank of England base rate.

In reality, future market expectations for interest rates and banks' funding and lending targets and appetite for business are what really matters.

Market interest rate expectations are reflected in swap rates. A swap is an agreement in which two banks agree to exchange a stream of future fixed interest payments for another stream of variable ones, based on a set price.

These swap rates are influenced by long-term market projections for the Bank of England base rate, as well as the wider economy, internal bank targets and competitor pricing.

In aggregate, swap rates create a benchmark of where the market thinks interest rates will go - though they can shift quickly in light of economic changes. 

Any borrowers hoping for a return to the rock bottom interest rates of 2021 will likely be disappointed. However, savers will be reassured that rates are not expected to plummet to the depths again.

What next for mortgage rates?

The best mortgage rates have almost hit 3.5 per cent with a number of lenders making aggressive cuts across home loan deals in the run up to Christmas.

Typical rates on two and five-year fixed mortgages have been drifting downwards.

The average two-year fix is now 4.81 per cent while the average five-year fix is 4.88 per cent, according to the latest data from rates scrutineer Moneyfacts.

On a £200,000 mortgage being repaid over 25 years that would mean paying either £1,147 a month or £1,155 a month. 

However, for the vast majority of households, a fixed mortgage rate somewhere between 3.55 and 4.25 per cent should be achievable depending on the level of equity or size of deposit. 

Best mortgage rates and how to find them 

Mortgage rates have risen substantially over recent years, meaning that those remortgaging or buying a home face higher costs.

That makes it even more important to search out the best possible rate for you and get good mortgage advice, whether you're a first-time buyer, home owner or buy-to-let landlord.

Contact us today to discuss your specific needs and requirements!