The Bank of England is expected to cut interest rates tomorrow by 0.25% to 4% in a move which will be warmly welcomed by homeowners.
The central bank’s decision makers the Monetary Policy Committee will reveal the outcome of their meeting at 12pm on Thursday 7 August but the markets have already priced in a reduction.
Laith Khalaf, head of investment analysis at AJ Bell, explained why the interest rate cut was such a certainty.
“At the last meeting in June,” he explained, “three committee members already voted for rates to fall to 4%. Since then, economic data has been poor and the labour market looks like it’s weakening.
“The unemployment rate has risen to its highest level since the pandemic, and wage growth continues to cool. No doubt one of the factors behind a weaker labour market is the national insurance hike announced by the chancellor in last year’s Budget, which came into force in April.
“On a very simplistic measure of Bank behaviour, it’s also time for a cut. The Bank of England (BoE) has been metronomic in its activity during this rate-cutting cycle, with base rate getting chopped back every three months since last August.
“This fits in with the ‘gradual and careful’ narrative expounded by the Bank. One year on from that first rate cut, the steady drum beat of the rate-cutting cycle demands another thump.”
What will happen to your mortgage if rates are cut?
If the cut goes ahead as expected, homeowners with tracker mortgages will see their mortgage rate fall and their repayments reduce. These borrowers will need to check with their mortgage lender as to when the cut will be factored in – but most lenders should react quickly.
Those on variable rates may see reductions too, although these may not be immediate.
If you are currently on a fixed-rate deal your repayments will not change. Anyone looking for a fixed-rate mortgage will have noticed prices have been falling in recent weeks as lenders responded to falling swap rates ahead of the predicted Bank of England cut.
Khalaf said: “A rate cut also won’t result in a huge change in fixed rate mortgages, seeing as it is already baked into market prices. Fixed rate mortgage borrowers are effectively already enjoying the benefits of forecast future rate cuts in the rates on offer today.
“There may be a little movement up or down in the fixed mortgage market if money markets react to the precise split of the vote, or the forward projections provided by the Bank.
“A shock decision to leave rates on hold would push mortgage rates up though, as the market reacts to a more hawkish position from the central bank.”
Will interest rates keep falling in 2025?
It is a year since the BoE made its first interest rate cut in this cycle and it then made subsequent reductions in November 2024, February 2025 and in May 2025.
Predictions at the start of the year suggested there would be several cuts in 2025 and if tomorrow’s is the third, it begs the question – will there be another before the year is out?
Khalaf said: “The fixed rhythm is expected to carry on too, with further rate cuts pencilled in by the market for November and February, taking us down to 3.5% by next spring on a quarterly descent.”
He added: “However, there are plenty of things which could throw the schedule off course, even though it’s clear the market is extrapolating in straight lines at the moment.
“The effects of tariffs on the global economy, the unpredictable prospects for energy prices, and a tricky autumn Budget in the UK are just three factors which will weigh on the direction of interest rates from here.”
