The steady drum beat of this rate-cutting cycle demands action from the Bank of England

Laith Khalaf
5 August 2025
  • Expect a bond market backlash if the Bank of England doesn’t cut rates
  • Fixed mortgage pricing won’t move too much on the back of an interest rate cut itself
  • The Bank has been metronomic in its quarterly rate cuts thus far…
  • …and is expected to be so until next February, when base rate is projected to hit 3.5%
  • Why the Bank is cutting rates even though CPI sits at 3.6%

Laith Khalaf, head of investment analysis at AJ Bell, comments:

“To cut, or not to cut, is not the question facing the Bank of England interest rate committee. At least, that’s what the markets are saying. They have already almost fully priced in an interest rate cut this week, so focus will lie not so much on the decision itself as on the precise split of the votes from the interest rate committee, and on the forecasts for inflation and growth in the accompanying economic report. Of course, if the Bank of England chooses not to cut rates, there will be a sizeable backlash in the bond markets. But that seems unlikely on this occasion.

“At the last meeting in June, 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 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.

“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. If it plays out this way, it would surely go down as the tidiest rate-cutting cycle on record, especially in light of what’s going on in the world outside of Threadneedle Street. 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.

“It might seem odd for the Bank of England to be cutting interest rates at the same time that inflation is pulling away from the 2% target. The latest reading for CPI was 3.6%, up from 2.6% just a few months ago in March. However, the Bank’s actions are based not on the current inflation rate, which tells us about price rises over the last 12 months, but rather on future inflation, forecast over the next three years. Importantly, the Bank of England’s previous forecasts show inflation rising over the course of this year before falling back, so prices are currently evolving broadly in line with what the Bank has been expecting.

“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.”

Laith Khalaf
Head of Investment Analysis

Laith Khalaf started his career in 2001, after studying philosophy at Cambridge University. He’s worked in a variety of roles across pensions and investments, covering both the DIY and the advised sides of the business. In 2007, he began to focus on research and analysis, and has since become a leading industry commentator, as well as a regular contributor to the financial pages of the national press. He’s a frequent guest on TV and radio, and for several years provided daily business bulletins on LBC.

Contact details

Mobile: 07936 963 267
Email: laith.khalaf@ajbell.co.uk

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