How far will interest rates fall?

Official UK interest rates have fallen again - from 4% to 3.75% - after rate-setters responded to further falls in the pace of prices rises.

The Bank of England’s Monetary Policy Committee (MPC) voted 5-4 to cut rates in December 2025. A reduction was assumed likely in the weeks leading up to the decision but became a near-certainty after officials confirmed that inflation had fallen in November.

The Bank uses interest rates to influence inflation. Higher rates increase borrowing costs and leaves less money in the hands of individuals and businesses. This dampens demand and reduces upward pressure on prices. The Bank has a target of keeping inflation at 2% a year.

UK consumer price index (CPI) inflation dipped to 3.2% in November, down from 3.6% in October. The fall was larger than expected and added to the evidence that inflation, having risen through the first half of 2025, was now on a downward trajectory.  

Markets now believe another cut will arrive in the first half of 2026 - taking the Bank rate to 3.5%. The picture beyond that is less certain although the odds of a second rate cut increased following the fall in inflation this week.

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Beyond the headline rate for price rises, labour market data this week showed regular pay rising less quickly - by 4.6% a year in the August to October period, down from 4.7% a month earlier. The labour market was weakening in other ways, too, with employment lower, unemployment higher and more people claiming out-of-work benefits. These effects may also reduce demand in the economy, leading to lower inflation.

At the same time, overall growth in the economy is weak. The latest figures for the month to October showed a 0.1% fall in GDP. This is also reduce inflationary pressure and gives the Bank an incentive to lower rates to spur growth.

• Read: What do rate cuts mean for markets?

The next central bank meeting is scheduled for 5 February 2026 followed by meetings on:

• 19 March 2026
• 30 April 2026
• 18 June 2026

How rates have changed 

The path ahead for interest rates, as implied by market prices, has been changing. The chart below shows the implied level of interest rates from 16 September, 18 November and 16 December 2025.

This is based on market prices for government bonds with different lengths of maturity.

The most recent reading (in blue) shows that markets now expect rates to fall to near 3.5% in about six months. This would indicate one more quarter-point cut by the middle of next year. Forward prices beyond that suggest rates could fall further but there is a question over whether this will translate into a further reduction in the bank rate, which tends to move in quarter-point steps.
 

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