How far will interest rates fall?

This guide to interest rates is updated each week or as markets move. If you sign up to our Pulse alerts, you'll be the first to know when forecasts move.

We have written previously about investments that stand to gain when interest rates fall - you can read that here.

The Bank of England has now begun to cut interest rates. Its Monetary Policy Committee (MPC) reduced rates from 5.25% to 5% in August but voted 8-1 to keep them on hold at the September meeting.

The market expects more rate cuts soon - see the chart below - but the question is when, and how far, rates will eventually fall. Both inflation - the rate of price rises - and growth in the economy will help determine the answer.

The Bank aims to keep inflation close to a target level of 2%. To achieve that, it has been applying higher interest rates to slow the economy down and bring inflation down from the very high levels seen in the past two years.

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Inflation has fallen a long way and was recorded as being 2.2% (Consumer Price Index) in August down from 11.1% in October 2022.

Meanwhile, growth in the economy has slowed, with zero GDP growth reported in both June and July.

The backdrop suggests the case for further rate cuts now is finely balanced. The Bank may wish to see further falls in inflation before it embarks on further cuts.

The next central bank meeting is scheduled for 7 November followed by meetings on:

• 19 December
• 6 February (2025)
• 20 March (2025)

What are the latest forecasts?

The Bank will be wary of cutting rates too quickly and the consensus appears to be that just one more rate cut will follow this year. Lowering rates tends to increase demand in the economy which can feed through to higher prices.

The Bank has said that it expects inflation to rise again this year, to around 2.5%, before coming back down next year.

The Bank has been watching wage data closely because pay has been rising strongly, threatening to rekindle demand and higher inflation more widely.

Recent wages data (released on 10 September) showed pay growing at 5.1% a year in the three months to July, down from 5.4% a month before. This remains a high level but the Bank appears optimistic that wage inflation will ease from here.

How forward market interest rates have changed

The path ahead for interest rates, as implied by market prices, has been moving lower. The chart below shows the implied level of interest rates from mid-August, the start of Start of September and then on 14 August. The implied rate in 18 months' time is now 3.87%. The Bank operates in quarter point changes so this rate is only indicative.

The fact that the implied path has fallen suggests that the market is revising its assumptions for future interest rates downwards.

Important information - investors should note that the views expressed may no longer be current and may have already been acted upon. Overseas investments will be affected by movements in currency exchange rates. Reference to specific securities should not be construed as a recommendation to buy or sell these securities and is included for the purposes of illustration only. An investment in a money market fund is different from an investment in deposits, as the principal invested in a money market fund is capable of fluctuation. Fidelity's money market funds do not rely on external support for guaranteeing the liquidity of the money market funds or stabilising the NAV per unit or share. An investment in a money market fund is not guaranteed. The value of shares may be adversely affected by insolvency or other financial difficulties affecting any institution in which the Fund's cash has been deposited. There is a risk that the issuers of bonds may not be able to repay the money they have borrowed or make interest payments. When interest rates rise, bonds may fall in value. Rising interest rates may cause the value of your investment to fall. Tax treatment depends on individual circumstances and all tax rules may change in the future. Withdrawals from a pension product will not be possible until you reach age 55 (57 from 2028). This information is not a personal recommendation for any particular investment. If you are unsure about the suitability of an investment you should speak to one of  Fidelity’s advisers or an authorised financial adviser of your choice.