Interest rates: Hold for now but cheaper mortgages could be just weeks away

Mortgage holders and borrowers could be just weeks away from seeing a cut in interest rates after the Bank of England sat on its hands at its latest meeting.

Experts said there was now a reasonable likelihood of a further quarter-point cut in rates at the next meeting of the central bank’s monetary policy committee (MPC), due to take place on August 7, with one more similar reduction before the end of the year. That would take the official bank base rate down to 3.75 per cent and likely trigger cheaper deals for those looking to remortgage or take out a home loan for the first time.

The prediction came as the Bank of England insisted that interest rates remain on a “downward path” despite being kept at 4.25 per cent by its nine-strong committee of rate-setters. In a split vote, with six members opting to hold and three preferring to cut, the MPC said a “gradual and careful approach” to reducing borrowing costs continued to be the right course of action.

The Bank of England in the City of London.

Bank governor Andrew Bailey said: “Interest rates remain on a gradual downward path, although we’ve left them on hold today. The world is highly unpredictable.”

He added that there were “signs of softening in the labour market” - referring to indicators including slower hiring and wage growth easing - which were being closely watched to see how far they feed into UK inflation. The bank has a remit to keep inflation pegged at around 2 per cent but it is currently hovering at just over 3 per cent having touched 11.1 per cent in late 2022 at the peak of the cost-of-living crisis.

The UK central bank’s decision to freeze rates came a day after the US Federal Reserve also held interest rates steady as it awaits evidence of President Donald Trump’s tariff impact.

Professor Joe Nellis, economic adviser at MHA, the accountancy and advisory firm, said: “The Bank of England’s decision to hold interest rates does not come as a surprise but it will not be welcome news to the UK government as they look to bounce back from the disappointing performance of the economy in April.

Central bank policymakers remain concerned about rising prices and sticky rates of inflation.

“The government would have hoped for an aggressive rate-cutting strategy from the Bank of England throughout 2025 to encourage consumer spending and corporate investment, but caution has crept in and led to a pause on cuts for the moment.

“It is likely, although not certain, that we will see a cut in UK rates in August and perhaps one more before the end of the year, but we are unlikely to see this pattern extended into 2026.”

Felix Feather, economist at Scottish funds firm Aberdeen, said: “As expected, the Bank of England kept its policy rate on hold. But the vote on the MPC was marginally closer than expected, with three members voting for a cut.

“The slightly more dovish than expected vote split doesn’t change our view that the Bank of England is most likely to stick to a quarterly pace of cuts going forward in line with its ‘gradual and careful’ guidance.”

Meanwhile, Thomas Pugh, chief economist at audit, tax and consulting firm RSM UK, said he was still expecting two more rate cuts this year, while pointing to a “significant risk” that the MPC may choose to “skip” one of those cuts if energy prices keep rising.

Global oil and natural gas prices have surged in recent weeks, which threatens to push up energy costs in the UK.

Furthermore, the MPC noted that Trump’s tariff policy was posing risks to global trade and continuing to create uncertainty. But it said that deals struck between the US and other countries, including the UK, meant that the direct impact of the “trade shock” on global growth could be smaller than it had forecast last month.

Sarah Coles, head of personal finance at investment platform Hargreaves Lansdown, said: “You only have to look at recent moves in the mortgage market to see how tough the banks are finding it to price their deals right now. Recently we’ve seen some banks cut rates, some increase them, and some do a combination of both.

“You’d be forgiven for thinking that the Bank of England holding rates might bring some stability, but while that’s true for tracker rates, fixed-rate deals are another matter entirely. They’re facing a strange combination of factors, with expected rate cuts pointing to a future of lower rates, and rising bond yields raising the cost of fixed deals and pushing rates up. Neither of these things look set to change in a hurry, so we may need to get used to uncertainty for a while.”

First-time buyers

Andrew Gall, head of savings and economics at the Building Societies Association (BSA), said many first-time buyers would be disappointed by the pause in rate-cutting, though he still expects further bank rate cuts this year.

“Since 2020, mortgage repayments for new homebuyers have risen by around 30 per cent, now accounting for 22 per cent of income, meaning affordability is a major barrier to homeownership,” he noted. “Building societies continue to find innovative ways to support aspiring homeowners, providing almost 37 per cent of first-time buyer mortgages last year. However, more flexible mortgage regulation is also needed to give lenders more opportunity to offer real help.”

There will be four more MPC rate-setting meetings before the end of 2025 - on August 7, September 18, November 6 and December 18.

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