Interest rates were only cut twice in 2024 with base rate falling from a high of 5.25 per cent to 4.75 per cent.
This was considerably less than economists and financial markets had forecast at the start of the year.
This time last year, the general consensus was that the Bank of England would cut interest rates up to six times in 2024.
Predictions varied from base rate finishing the year at 4.25 per cent to it being as low as 3.75 per cent by now.
But a rebound in inflation, strong wage growth, a resilient economy and low unemployment rates has resulted in the Bank of England holding fire on many of those cuts.
Markets are now predicting the central bank will cut rates three times next year to 4 per cent by the end of 2025.
Set to fall: The Bank of England is expected to cut interest rates further next year
Typically, every economist and big financial institution has their own independent forecasts about where interest rates will go next year.
We asked two major banks, Barclays and Santander, for their predictions, as well as economists from Capital Economics and Oxford Economics for their views.
If these forecasts are correct, we consider what they will mean for mortgage rates and weigh up whether borrowers should be fixing for two years or five years.
Santander
Interest rates to end next year at 3.75%
Back in October, Santander forecast that interest rates would fall to 3.75 per cent by the end of 2025. At that point the Bank of England base rate was at 5 per cent.
Looking further ahead, economists at Santander also said they think interest rates will remain between 3 per cent and 4 per cent for the foreseeable future.
Fast forward to the end of December and those same economists are sticking to their guns.
David Morris, head of homes at Santander UK said: ‘Base rate has kept us all on our toes over the last 12 months, and next year we expect some more movement with a further four cuts, meaning this time next year we forecast that base will sit at the 3.75 per cent mark, and maintain a position between 3-4 per cent for the foreseeable future.
Barclays
Interest rates to end next year at 3.5%
Barcalys is slightly more punchy than Santander, albeit not quite as dramatic as Goldman Sachs were in October when it forecast that interest rates would fall to 2.75 per cent by the end of 2025.
Barclays is expecting the central bank to cut rates on four separate occasions next year, with a modest 0.25 percentage point cut each time.
Jack Meaning, chief UK economist at Barclays said: ‘Beyond December, we retain our view that as uncertainty retreats and the signal from forward looking indicators becomes apparent in hard data, the MPC will be minded to accelerate from its default of quarterly rate cuts and move to sequential 25 basis point moves in February, May, June, August and September, leaving Bank Rate at 3.5 per cent.
‘This is the top of the range for neutral recently quoted by Swati Dhingra, a member of the Bank of England’s Monetary Policy Committee.
‘However, given the uncertainties, we think a majority of the committee will see this as consistent with policy being neutral.’
Five small cuts: Barclays expects interest rates to fall to 3.5 per cent by the end of 2025
Capital Economics
Interest rates to end next year at 3.75%
Economists at Capital Economics think the base rate will fall to 3.75 per cent by the end of next year and then to 3.5 per cent in early 2026.
They had previously forecast that interest rates would fall to 3 per cent by the end of next year, but have concluded that rates will now fall slower as a result of the Labour’s first budget and inflation being above the 2 per cent target.
Paul Dales, chief economist at Capital Economics said: ‘Our forecast suggests that after a dip in December, CPI inflation will rise further in January, perhaps to around 2.8 per cent.
‘So even though economic activity has been weaker than the Bank expected, the stronger-than-expected rebounds in wage growth and CPI inflation for November mean that the Bank won’t be able to worry less about inflation for a while yet.’
But even so, Capital Economics is still expecting four base rate cuts next year.
Ruth Gregory, deputy chief UK economist at Capital Economics said: ‘There was never much chance that the MPC would cut interest rates in December’s meeting, given recent upside surprises on inflation and wage growth,’ said Gregory.
‘Crucially, though, the MPC appears to have been more open to cutting rates this month than we had expected.
‘The weakness of economic activity appears to be weighing increasingly on MPC members’ minds.
‘The three MPC members who voted in December for a rate cut expressed concern that sluggish demand created a risk of inflation falling too far below the 2 per cent target in the medium term.
‘All things considered we haven’t changed our view that the Bank will continue to cut rates by 25 basis points a quarter until rates get to 3.5 per cent and that the Bank will cut rates further and faster than the Fed but by less than the ECB.
‘As a result, we think the markets have gone too far in pricing in only a 45 per cent chance of a rate cut in February and then just two further 25 basis point rate cuts next year.’
Current forecast: Capital Economics recently changed its interest rate forecast because it now thinks the Bank of England will cut rates more slowly as a result of the budget
Oxford Economics
Interest rates to end next year at 3.75%
Oxford Economics is also forecasting interest rates to fall by 1 percentage point to 3.75 per cent by the end of next year.
Andrew Goodwin, chief UK economist at Oxford Economics said: ‘We think it looks likely that the MPC will cut Bank Rate by 25bps in February, maintaining the ‘cuthold’ tempo.
‘Over the past couple of years, the focus of the MPC has almost entirely been on inflation, with very little emphasis on growth in their decision-making.
‘But the latest committee minutes suggested it is increasingly thinking about the implications of the recent weakness in activity and employment.
‘Bank of England agents also reported that April’s increase in employers’ national insurance contributions is weighing heavily on sentiment.
‘Signs that the MPC is beginning to adopt a more balanced consideration of growth and inflation dynamics reinforce our view that we’re likely to see a series of rate cuts in 2025.
‘We forecast that bank rate will be cut by 100 basis points in 2025, with a 25 basis point cuts in February, May, August, and November) to end the year at 3.75 per cent.’
To be continued: The Bank of England held interest rates at its December meeting, after inflation continued to rise above its 2 per cent target
Where will fixed mortgage rates end up?
Fixed mortgage rate pricing does not react to interest rates. Instead, mortgage rates preempt interest rate changes.
This means that future interest rate cuts by the Bank of England are already somewhat baked into fixed rate mortgage pricing.
This is why the lowest priced five-year fixed rate products are hovering just above 4 per cent, rather than above the Bank of England base rate at 4.75 per cent.
If interest rates are cut in line with market forecasts and reach 4 per cent by the end of next year – the mortgage rates that will be on offer at the end of next year will reflect what markets then think will happen to interest rates even further in the future.
If, for example, lenders think interest rates will be cut to 3 per cent or lower by the end of 2026, then the fixed mortgage rates on offer may be lower than they are now.
However, if lenders are of the view that interest rates will remain at 4 per cent, then mortgage rates are unlikely to be lower and potentially they may even be higher.
Andrew Goodwin, the chief UK economist at Oxford Economics says that he doesn’t think there will be a significant difference in fixed mortgage rates come this time next year.
He based his analysis on the average 75 per cent loan-to-value quoted fixed rate mortgage from the Bank of England.
‘The most recent data was for October and showed two-year fixes at 4.41 per cent and five-year fixes at 4.08 per cent,’ said Goodwin.
‘We think the recent increase in swap rates will push mortgage rates higher in the short-term.
‘But ultimately we expect the Bank of England to cut the policy rate more than markets anticipate next year, and this should mean that swap rates and mortgage rates eventually drop back during 2025.
‘Our forecast shows average two-year fixed rates at 4.3 per cent at the end of 2025 with five-year fixed rates at 4.15 per cent.
‘For borrowers refinancing expiring five-year fixes, this means a substantial increase in their mortgage costs – we estimate that borrowers in this situation in 2025 face an increase in their mortgage rate of 250 basis points.’
Already priced in: Fixed rate mortgages have already priced in future interest rate cuts by the Bank of England
What about borrowers on variable rates?
Anyone on tracker or variable mortgage rates should see their mortgage rates fall as base rate is cut.
Tracker rates follow the Bank of England’s base rate plus a set percentage, for example base rate plus 0.5 per cent.
Borrowers on variable rates such as ‘discount’ rates and also standard variable rates (SVRs) will also be sad to see base rate remain the same.
Standard variable rates are lenders’ default rates that people tend to move on to if their fixed or other deal period ends and they do not remortgage on to a new deal.
These can be changed by lenders at any time, and will usually rise and fall when the base rate does – but they can go up or down by more or less than the Bank of England’s move.
Thanks to previous base rate cuts the average SVR has fallen to 7.85 per cent, down from 8.18 per cent at the start of 2024.
Down to 3.75% – Andrew Goodwin, chief economist at Oxford Economics is forecasting four 0.25 basis point rate cuts next year
How long should you fix for?
For many borrowers either looking to move home, buy their first property or remortgage, this is the tricky bit.
The majority will either fix for five years or two years, but there are plenty who also fix for three years and some who even fix for 10 years.
People should worry less about the base rate rate and more about market expectations about future interest rates, according to David Morris, head of homes at Santander UK.
Market interest rate expectations are reflected in swap rates. A swap is essentially 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 something of a benchmark that can be looked to as a measure of where the market thinks interest rates will go.
Current swap rates suggest that mortgage rates won’t fall much further over the coming years.
As of 18 December, five-year swaps were at 4.05 per cent and two-year swaps at 4.29 per cent – both trending below the current base rate.
Short-term fix: David Morris, head of homes at Santander UK says that roughly two thirds of its customers are opting for two-year fixes
‘The relationship between base rate and fixed mortgage pricing isn’t linear,’ said Santander’s David Morris, ‘while it can certainly influence swap rates, global events play a key role in terms of dictating the funding costs that banks use to price mortgages.
‘Recently we’ve seen swap rates reducing slightly, so we may well see more lenders price downwards, as we did in mid-December – cutting rates across more than 70 products.
‘For those looking to remortgage, there’s clearly a debate as to whether to fix for two or five years.
‘Over the last three months, we’ve seen 65 per cent of customers opting for a two-year fixed, compared to 27 per cent choosing a five-year.
‘Currently five-year deals are especially competitive relative to to two- year deals, which might mean it is a good time for those who want to lock in a deal, while others might want to bide their time to see if two-year fixes drop further.
‘Either way, it’s a significant decision, and it’s incredibly important to consider your own individual situation first and foremost, as well as how comfortable you are with risk, given that rates are heavily impacted by the macro-environment.’
Paul Dales chief economist at Capital Economics thinks interest rates will eventually fall to 3.5 per cent in early 2026
Peter Stimson, head of product at MPowered Mortgages urges people to think very carefully before fixing for two years on the basis that interest rates will fall when they next need to remortgage.
He said: ‘If you are torn between choosing a two or five year fixed rate, ultimately, you’ll need to consider two main things.
‘First, what you think will happen to interest rates during the term of your mortgage and second how much certainty you need over your monthly mortgage payments and for how long.
‘Whilst the Bank of England is widely expected to cut its Base Rate three or even four times during the course of 2025, these potential cuts have largely been priced into the swaps rates, the mechanism lenders used to price mortgages.
‘This doesn’t mean mortgage rates can’t or won’t go lower, it does however mean that there are no guarantee rates will fall.
‘If you do choose a two-year fixed-rate loan, be aware that rates might have gone up rather than down when you come to remortgage after two years.
‘If you prefer to have certainty over your monthly payments for longer, a five-year fix could be a good option as five year rates are currently pricing lower plus you do not risk moving onto a higher rate in two years’ time should rates rise.’
Risky: Peter Stimson of MPowered Mortgages says that there are no guarantees that mortgage rates will be lower in two years time
Ultimately, the decision may just depend on how long someone intends to live in their home for.
‘Whilst nearly all mortgages are ‘portable’, meaning you can take your loan with you if you move home, things can get potentially tricky if your new place requires a larger size,’ added Stimson.
‘If you are planning to move within the next 5 years, then please mention this to your financial advisor as a longer term fixed rate may not be right for you.’
Mark Eaton, chief operating officer at longer-term lender April Mortgages thinks borrowers should generally be trying to avoid two-year fixes.
‘This fresh economic uncertainty means that further mortgage rate volatility is likely in 2025, with the Bank estimating that half of homeowners will see their payments rise over the next three years,’ said Eaton.
‘Borrowers should be derisking their position by avoiding two-year deals that can leave them more exposed to rate fluctuations and potential payment shocks when their fixed-term ends.
‘With future interest rate movements uncertain, a five-year fix or longer, shields borrowers from potential rate hikes and reduces the hassle and expense of frequent remortgaging.’
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