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Bank of England set to cut interest rates - new forecast of savings - DAILY EXPRESS
The Bank of England is poised to slash interest rates three times over the next six months in a move that could ease pressure on millions of mortgage holders, according to new forecasts. However, the wider economy is still facing a difficult period with years of sluggish growth, according to a leading economic think tank. Analysts at the EY Item Club expect the Bank's Monetary Policy Committee (MPC) to cut rates in August, November and again in February, taking the base rate down to 3.5%, its lowest level since 2022.
The prediction is part of the group's closely watched Summer Forecast, which upgraded UK growth prospects for this year - but warned the bounce would be short-lived. Matt Swannell, Chief Economic Advisor to the EY Item Club, said: "While the MPC appears more concerned about cutting interest rates too quickly rather than too slowly, a softening job market and cooling pay growth should provide reassurance that domestic inflationary pressures are set to fade, albeit gradually.
"We're likely to see interest rates cut again in August as the Committee maintains its pace of one 25bps cut per quarter." The report forecasts inflation to average 3.4% in 2025, higher than the 3% predicted in April, driven in part by rising energy bills and the recent hike in the National Living Wage and National Insurance costs for employers.
Despite this, EY says the Bank has room to act as the economy cools and the job market begins to loosen. M Swannell added: "There are [likely to be] continued headwinds over the next couple of years.
"There is uncertainty swirling around the economy that will affect businesses' large investment decisions; the government will continue to tighten fiscal policy; and there are still some effects from past interest rate rises - a lot of households on fixed mortgages will be refinancing at higher rates." The group forecasts unemployment to rise to 5% by the end of this year, up from 4.7%, as employers scale back hiring in response to mounting cost pressures.
It expects the labour market to "loosen in an orderly way", with hiring slowing rather than major job losses. The rate cuts are likely to come as a relief to homeowners due to re-fix their mortgages, many of whom are still grappling with the legacy of previous rate hikes.
However, Swannell warned that growth would remain "relatively meagre" through to 2027. GDP is expected to rise by 1% in 2025, up from a previous estimate of 0.8%, largely due to a flurry of business activity in the first quarter as firms rushed to beat incoming US tariffs.
"There was some activity and some additional exports brought forward and that lifted [the economy] in the first quarter," Swannell said. "But you can see from the size of the upgrade that the outperformance wasn't massive."
Growth is expected to stall again in 2026 at just 0.9%, with the economy reaching what Swannell described as its "cruising speed" of 1.5% in 2027. Business investment, which surged early this year, is expected to stagnate in 2026 due to continued global uncertainty and higher borrowing costs.
Anna Anthony, EY UK & Ireland Regional Managing Partner, said: "Business investment is expected to remain modest until 2027 and while interest rate cuts should reduce debt service costs and make financing cheaper, this will take time to materialise. Until then, businesses face a period of international uncertainty, alongside elevated labour and energy costs.
"Stimulating greater economic growth through business investment will require policy measures that actively incentivise companies to spend, even under challenging conditions." The housing market is predicted to see prices rise 3.5% this year, slowing to 2.5% in 2026.
Planning reform and lower interest rates are expected to support activity, but soaring construction costs and a tight labour supply will act as a brake on building. Meanwhile, household spending is tipped to grow just 0.9% this year, with a modest pickup to 1.1% in 2026 as real incomes begin to recover.
The EY Item Club warned that the Chancellor may have limited room to manoeuvre at the Autumn Budget due to rising debt costs, welfare pressures and weakening tax receipts. It said:
"US tariffs, high bond yields and recent changes to welfare legislation will have increased spending and reduced tax revenues, shrinking the Government's already-thin fiscal headroom.
This challenge could be even more significant if the Office for Budget Responsibility downgrades its growth assumptions at the Autumn Budget, or if the Government is required to accelerate defence spending before the end of this parliament."
