The Bank of England base rate is currently 4.0%, having fallen from a peak of 5.25% over the past year¹. While this downward trend has provided some relief to borrowers, the key question for homeowners and landlords is how low rates might go and when.

Inflation is now 3.8%, down sharply from a peak of 11.1% in October 2022, but it remains above the Bank of England’s 2% target². This means policymakers must proceed carefully, balancing the need to control inflation with the aim of supporting economic growth.

A recent discussion by the City AM Shadow Monetary Policy Committee revealed just how uncertain the outlook remains³.

• Four of the nine economists expect that the base rate could fall to 3% by the end of 2026, offering hope of lower borrowing costs in the future.
• Others forecast a slower pace of cuts, suggesting only one or two further reductions, with rates settling nearer 3.5%.

This difference of opinion reflects the challenge of determining the UK’s “neutral” rate – the level at which interest rates neither encourage rapid growth nor suppress it. Current market expectations suggest that this neutral rate may be higher in the UK than elsewhere, due to lingering inflationary pressures and structural factors in the economy.

Leading economists have provided a range of predictions³:

• Anna Leach, Chief Economist at the Institute of Directors, expects rates to stabilise between 3.5% and 3.75%, citing continued uncertainty following the pandemic and the unknown long-term impact of technological changes such as artificial intelligence.
• Ben Ramanauskas, Senior Research Fellow at Policy Exchange, believes rates could fall to 3% as a weakening labour market and tax pressures help bring inflation back to target more quickly than expected.
• Jack Meaning, Chief UK Economist at Barclays, forecasts a range of 3.0% to 3.5%, but warns that delaying rate cuts for too long could risk slowing the economy further, potentially forcing the Bank to cut more sharply later on.
• Jonathan Haskel, Professor at Imperial College and former member of the Bank of England’s Monetary Policy Committee, supports a 3.5% estimate, suggesting productivity gains from AI could keep rates slightly higher than in previous cycles.
• Julian Jessop, Independent Economist, also predicts 3.5%, based on inflation stabilising at 2% and real economic growth averaging 1.5%.
• Kallum Pickering, Chief Economist at Peel Hunt, takes a slightly higher view, expecting rates to settle at 3.75% due to persistent inflation pressures and strong domestic demand.
• Katharine Neiss, Chief European Economist at PGIM Fixed Income, sees rates falling to 3%, pointing to a cooling labour market and a lower neutral rate.
• Ruth Gregory, Deputy Chief UK Economist at Capital Economics, also forecasts a drop to 3% next year, highlighting how weaker employment figures could accelerate progress towards the inflation target.
• Vicky Pryce, Chief Economic Adviser at the Centre for Economics and Business Research, agrees that slowing inflation could give the Bank of England room to cut rates to 3%.

For borrowers, even small changes to the base rate can have a significant effect:

• Tracker and variable rate mortgages: Payments move directly in line with base rate changes, so a cut would reduce monthly costs almost immediately.
• Fixed-rate mortgages: Current payments remain the same until your deal ends, but the cost of your next deal depends on where lenders expect rates to be in the future.

A reduction of just 1% on a £200,000 mortgage over 25 years could save more than £100 per month, making forward planning essential.

While rates may continue to fall gradually, the timing is uncertain. Acting early is key:

1. Check when your mortgage deal ends and start planning well before it expires.
2. Avoid falling onto your lender’s Standard Variable Rate (SVR), which is often several percentage points higher than fixed-rate deals.
3. Speak to a mortgage broker with access to a comprehensive panel of lenders. They can help you decide whether to lock in a fixed rate now or wait, based on market conditions and your personal circumstances.
4. Consider your wider financial plan, including protection such as income protection or life insurance, to ensure you can keep your home secure in the event of illness or loss of income.

While there is widespread agreement that interest rates will continue to fall, economists differ on how far and how fast cuts will happen. Whether rates settle closer to 3% or 3.75%, staying informed and proactive will help you make the best decisions for your mortgage.

By reviewing your mortgage early and seeking professional advice, you can avoid unnecessary costs and take advantage of falling rates when they arrive.