Market News

The Bank of England (BoE) decided to keep interest rates unchanged at 4.75% in its final monetary policy decision of the year, leaving borrowers and markets uncertain about whether 2025 will bring cuts or continued caution.

Traders are betting that the BoE will reduce interest rates twice this year, lowering the base rate from 4.75% to 4.25% by the end of 2025.

“It is anticipated that there will be at least two 0.25% reductions in the base rate [this] year. These cuts could provide some much-needed relief for affordability, particularly for first-time buyers and those looking to remortgage,” said Rosie Hooper, chartered financial planner at Quilter Cheviot.

The expectation for rate cuts next year is reflected in market pricing, with investors assigning a 70% chance of a cut in February.

However, with only two rate reductions anticipated throughout 2025, it marks a far less aggressive stance compared to the outlook for the US Federal Reserve and the European Central Bank, both of which are expected to take more decisive action.

David Hollingworth, associate director at L&C Mortgages, agreed that rate cuts are likely but believes they will not be dramatic. “Further base rate cuts are expected [this] year but the Bank of England has played a consistent line that those reductions are more likely to be slow and steady in pace,” he said.

Goldman Sachs analysts believe the BoE may opt for quarterly rate reductions, “given firmer near-term inflation numbers and uncertainty around the impact of the employer national insurance hike.” Meanwhile, analysts at Nomura expect rates to settle around 3%-3.5% in the long term.

Bank of America analysts remain cautious, warning that it may be premature for the BoE to pre-commit to a sustained cutting cycle. "We think it's too early for the BoE to pre-commit to a sustained cutting cycle or to conclude that risks to inflation returning sustainably to the 2% target in the medium term have dissipated,” they said in a note to clients.

Interest rate decisions have a direct impact on millions of households across the UK, influencing mortgage rates, credit card charges, and savings yields. The first rate cut in over four years occurred in August, followed by another in November.

In his December statement, BoE governor Andrew Bailey said: “We think a gradual approach to future interest rate cuts remains right.”

However, he cautioned that heightened economic uncertainty meant the Bank “could not commit to when or by how much we will cut rates in the coming year.”

James Smith, developed markets economist at ING, outlined a potential path for rates in 2025. “Our base case is for back-to-back rate cuts from February onwards, with Bank Rate falling to 3.25% later in the year. For the time being though, [inflation] data means the Bank will stay the course. It'll keep rates on hold and offer no major hints on what'll come next, beyond re-affirming its commitment to gradual cuts.”

UK inflation rose to an eight-month high of 2.6% in November, following chancellor Rachel Reeves’ announcement of £40bn in tax hikes in the October budget. This marked an uptick from 2.3% in the previous month, according to the Office for National Statistics (ONS).