Inflation is set to climb early next year, but mortgage rates and interest rates should still fall, experts have told The i Paper.
The Consumer Prices Index (CPI) measure of inflation could climb to 3 per cent in the first few months of next year, but the Bank of England is still likely to cut interest rates multiple times in 2025, economists have said.
And mortgage experts have said that rates on home loans will gradually fall if economists’ forecasts come to pass.
Inflation hit 2.6 per cent in the latest reading, released on Wednesday morning, which was broadly in line with expectations.
Of the six economists polled by The i Paper, three expected four interest rate cuts in 2025, two thought there would be three whilst one more considered there to be two or three.
Rob Wood, chief UK economist at Pantheon Macroeconomics, said the forecaster remined “comfortable” forecasting three rate cuts next year in February, May and November.
But he added that Pantheon was starting to “contemplate” whether the Bank might wait until May for its first cut, as a response to persistent inflation.
Paul Dales, chief UK economist at Capital Economics, said he expected four rate cuts in 2025.
How UK inflation compares to Europe and the rest of the world
Read MoreHe predicted that inflation would rise to around 2.8 per cent in January, but added: “We do think that by the end of 2025, CPI inflation will have fallen back close to 2 per cent. But in the first half of the year, we suspect it will be a bit higher than most expect.”
The Bank’s Monetary Policy Committee (MPC) tends to lower interest rates as it becomes confident inflation is returning to its 2 per cent target.
It has cut twice this year – taking rates to 4.75 per cent – but is widely expected to hold them at this level when it meets on Thursday.
Predictions of where interest rates will go in the future have a major bearing on Bank’s swap rates, which a key factor in mortgage pricing.
If the MPC is expected to cut rates more quickly than previously, then swap rates fall, and so do mortgage rates.
Mortgage experts have said that at the moment, lenders are likely to gradually reduce the price of their home loans in 2025 as rate cuts “feed through”.
David Hollingworth, associate director at L&C Mortgages, said: “The forecasts on base rate movement next year seem to alter in how many cuts may feed through, but three or four gradual cuts aren’t out of the question.
“As those feed through it should help to ease mortgage rates, especially the shorter-term fixed rates.”
Nick Mendes, of John Charcol brokers, added: “Mortgage rates are expected to decline in 2025, but the extent and pace of this reduction will depend on several factors. If swap rates rise – perhaps due to an expectation of fewer rate cuts -mortgage rates often follow suit, even when the bank rate is reduced.
“Stable market conditions will be essential for significant rate reductions.”
What economists have said
Paul Dales, UK chief economist at Capital Economics: “We’re still on four cuts in 2025, to 3.75 per cent by the end of the year and then one more in 2026 to 3.5 per cent. Our forecast suggests that after a dip in December, CPI inflation will rise further in January, perhaps to around 2.8 per cent.
“We do think that by the end of 2025, CPI inflation will have fallen back close to 2 per cent. But in the first half of the year, we suspect it will be a bit higher than most expect.
“So even though activity has been weaker than the Bank expected, the stronger-than-expected rebounds in wage growth and CPI inflation published yesterday and today mean that the Bank won’t be able to worry less about inflation for a while yet.
“The 2.8 per cent doesn’t incorporate any influence from the rise in national insurance [from the Budget]. I think that influence will come in over a longer time period. That said, businesses’ expectations for the growth of their own selling prices over the next year have started to rise”
Rob Wood, chief UK economist at Pantheon Macroeconomics: “Looking ahead, we expect headline inflation to reach 3.1 per cent in April 2025 and stay at or above 3 per cent until October 2025. We expect core goods price rises to tick up, reflecting somewhat stronger cost growth. Motor fuels inflation will boosted by base effects, and duty hikes will raise tobacco inflation.
“We remain comfortable forecasting three rate cuts next year (February, May and November) and one more in 2026, but we are beginning to contemplate whether the MPC will respond to persistent inflation pressures by holding rates in February, instead waiting until May to cut again. A lot rides on the MPC’s survey of pay settlements that will be published in the February Monetary Policy Report.”
Edward Jones, senior lecturer in economics at Bangor University: “Inflation numbers are going in the wrong direction, no one is happy about that. However, they are where the Bank of England expects them to be. The biggest worry today is core inflation which rose again and highlights how inflation is embedded in. With next year, there is a lot of uncertainty with how the conflict in Ukraine will play out and Trump’s [second term]. There is going to be trade disruptions but how much we will get impacted is yet to be seen.
“The Bank will hold interest rates tomorrow and we can expect four cuts to interest rates next year, bringing it to 3.75 per cent.
“We don’t fully know the impact of NI employer contribution yet. The magnitude is uncertain but it will have a negative impact of inflation.”
Thomas Pugh, economist at RSM UK: “The rebound in inflation to 2.6 per cent in November is probably the start of a gradual climb which will see headline inflation return to 3 per cent early next year.
“While the MPC won’t want to drive the economy into stagnation, or worse an actual recession, the priority will be bearing down on inflation given that consumers inflation expectations are climbing again – even if that means a period of slower growth. That won’t stop the MPC from cutting interest rates next year, but it will make it more cautious. A rate cut in February has gone from a sure bet to a fifty-fifty chance.
“I’m still predicting four cuts in 2025, but risks are definitely weighted towards fewer.”
Samuel Miley, managing economist and forecasting lead at the Centre for Economics and Business Research: “Our forecast has been revised to three cuts next year, taking the base rate to 4 per cent by year-end.
“The inflationary impact of policies announced at the Budget and expectations of stronger energy price inflation are two factors.”
Monica George Michail, associate economist at the National Institute of Economic and Social Research: “We expect two to three cuts of equal magnitude (0.25 percentage points) next year.
“We expect the MPC to keep rates on hold in tomorrow’s meeting, and to gradually cut rates in 2025. However, we think the Bank will remain cautious given elevated wage growth, global uncertainty around the Trump presidency, and inflationary pressures introduced in the latest Budget.”
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