Economists are predicting that concerns for the economy could force the Bank of England to reduce the base rates four times in the upcoming year, with the first cut expected in February. If these predictions hold true, the base rate could decrease from its current 4.75 percent to 3.75 percent.
Some economists even suggest that the rate could fall as low as 3.25 percent. This would be a significant relief for home buyers and those looking to remortgage, as borrowing rates on some fixed-rate deals could drop to around 3 percent by next Christmas.
Recent figures have raised concerns, showing that the UK economy has stagnated at the end of 2024. While property sales are expected to surge in the first quarter of 2024 as buyers rush to complete purchases before an increase in stamp duty adds thousands to costs, there are fears of a subsequent slowdown.
This could lead to a decrease in consumer spending, which could hinder economic growth unless stimulated by a fall in interest rates. These predictions of base rate reductions come from a survey of 51 economists participating in The Times’s eighth annual economists.
The Bank of England is likely to be forced to cut interest rates four times in the year ahead, according to economists.
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Of these, 35 percent predicted the base rate would be lowered to 3.75 percent, 15 percent said it would drop to 3.5 percent, and three suggested the Bank would be forced to cut it to 3.25 percent over the next 12 months. The remaining 22 respondents predicted the base rate would be lowered to between 4 percent and 4.25 percent.
Economic growth in the UK is projected by a majority of respondents to be within the 1-2 percent range next year. Highlighting the challenges for policymakers, there are also cautions that strong wage growth and inflationary pressures are expected due to the government’s hike in employers’ national insurance.
Only two experts anticipate inflation falling beneath the Bank of England’s 2 percent target by 2025, with 40 percent predicting an annual consumer price inflation between 2.5-3.5 percent. The current annual inflation stands at 2.6 percent, according to the official figures for November.
Wages are seen as a potential key driver of inflation in 2025 by over a third of economists, 37 percent, with 70 percent stating annual earnings growth might remain between 3-5 percent. However, according to the Bank, for inflation to reduce sustainably to 2 percent in the medium term, wage growth would need to decelerate to the 2-3 percent mark.
Former external member of the Bank’s Monetary Policy Committee (MPC), Andrew Sentance, commented in The Times, saying, “pay rises of 3-4 percent still means labour costs rising by about 6 percent once NI rise is added in”.
The Bank’s MPC remains split on the course for interest rates, with six members voting to maintain the base rate at 4.75 percent during December, while three supported a reduction to 4.5 percent. Among the six was Catherine Mann, an external member, who has expressed openness to a potentially more aggressive stance.
Jumana Saleheen, a former Bank official and now chief economist at Vanguard, commented on the potential economic consequences, saying: “the net impact of the budget announcements [will be] the main driver behind slightly elevated UK inflation”. Survey findings indicate that economists anticipate the European Central Bank to quicken its pace of interest rate reductions in 2025.
Over half the respondents forecasted borrowing costs dipping to 2 percent or below. Currently, the eurozone’s benchmark interest rate stands at 3 percent, having dropped more swiftly than most developed nations. On the future direction of US interest rates, opinions among economists are divided after the Federal Reserve reduced borrowing costs three times in 2024.