The Bank of England (BoE) is widely expected to cut interest rates for the fourth time since August when its Monetary Policy Committee (MPC) meets next month.
A 25 point cut to the base rate would leave it at 4.25 per cent, the lowest level since early May 2023.
While some analysts suggest a double cut – 50 basis points to 4 per cent – could be on the cards as recently as a month ago, that appears improbable this time around in light of the BoE’s “gradual and careful” approach to controlling inflation.
The MPC may even see one or two votes in May for a double cut, but The Independent understands that back-to-back rate cuts are a more likely scenario as it stands.
Here’s what can impact interest rate decisions and what else could change for the year ahead.
Interest rates vs inflation
The bank rate plays a key role in how the Bank of England manages inflation. In simple terms, when inflation is high, the BoE may increase the interest rate.
This makes borrowing more expensive for both individuals and businesses, which can reduce spending and investment. As a result, this helps to slow down rising prices and bring inflation under control.
When inflation starts to get close to the objective of two per cent, interest rates can be lowered again, with the BoE attempting to strike a balance of stimulating investment in the economy while not letting price and wage rises shoot up too fast.
Lower interest rates mean lower borrowing costs, including on personal loans and mortgage repayments, though also mean lower returns for those with savings accounts.
Inflation has been on the way back down in the UK, which is a significant factor behind the BoE’s expected decision to cut rates, though they won’t cut them too fast as inflation is expected to pick up again in April and over summer.
In terms of next month’s probable cut, mortgage rates have likely been largely priced in already as they are based on swap rates, which are essentially future expectations of interest rate movements.
Business and growth
Another core part of the BoE’s decision will be based on business spending, along with economic growth.
It’s important to have a growing economy, and the reverse of the above applies: lowering interest rates can stimulate businesses into spending more money on projects and personnel, giving other businesses in turn more income and allowing people to have more disposable income, thereby spending more and themselves contributing to economic growth.
British consumers have faced a tough few months with increased taxes, lowered growth forecasts and rising bills – so news of the International Monetary Fund (IMF) again cutting the UK’s likely economic growth this year is another potential blow.
While wider global trade and economic conditions will form part of the BoE’s considerations when it comes to cutting interest rates, the likelihood is that the news will not have any dramatic immediate consequence to their short-term plans.
The IMF has predicted global growth will be 0.5 percentage points lower than previously forecast, while the UK sees a similar downgrade to just 1.1 per cent for this year.
That reflects not only the effect of Trump tariffs but also rising energy bills, weaker consumer buying and higher inflation – which is forecast to rise again and peak at above 3.5 per cent over the summer.
What happens after May?
Even the IMF themselves underline the fact that everything could still change significantly – after all, these sweeping cuts in growth expectations are to projections only made back in January.
IMF chief economist Pierre-Oliver Gourinchas noted that “many possible paths exist, reflecting the unpredictability surrounding future trade policy and the varied impact of tariffs across different countries.”
In interest rate terms, watching UK inflation will be a good indicator of what the BoE will do next, but former deputy governor and chief economist of the Office for Budget Responsibility (OBR) Charlie Bean has already called for greater action to be taken through bigger rates cuts.
Two further interest rate cuts are still predicted by many analysts after May.
Lower rates could also make it easier for first-time buyers to get on the property ladder, would lower government borrowing costs and ease pressures on UK businesses after hiked labour costs this year – but the BoE’s primary focus appears to be on not letting inflation run riot again as it did in such costly fashion two years ago.