The UK economy is currently navigating a complex landscape. While inflation continues to ease, wage growth remains strong—raising important questions about the future direction of interest rates.
The Bank of England’s (BOE) decision on 8 May 2025, reduced Interest Rates by 0.25% to 4.25% and financial markets, households, and businesses will be watching to see what impact this has.
So, what do the latest economic figures mean for interest rates, borrowing costs, and your personal finances?
Strong Wage Growth Continues
Data released by the Office for National Statistics (ONS) on 15 April shows that average earnings (excluding bonuses) rose by 5.9% in the three months to February 2025.
This means real wages—wage growth after adjusting for inflation—increased by 2.1% over the same period.
While this growth is encouraging, it’s important to remember that:
- These figures represent averages and may not reflect individual experiences.
- Many households are still recovering from the financial strain of high inflation experienced between 2021 and 2023.
Nevertheless, the overall wage trend signals resilience in the UK labour market, which may influence the Bank of England’s future rate decisions.
Inflation Returns to Target Range
Inflation has been falling gradually and is now within the Bank of England’s target range.
- Consumer Prices Index (CPI) inflation was 2.6% in the latest reading—slightly below economists’ forecasts.
- Core inflation (which excludes more volatile items such as food and energy) fell to 3.4%, a significant improvement from previous highs.
This decline in inflation suggests that underlying price pressures in the economy are beginning to ease. That said, inflation remains above the target, meaning the BoE may still proceed with caution.
What Could Happen to Interest Rates?
The Bank of England’s Monetary Policy Committee (MPC) considers a variety of economic indicators when setting the base rate. While the headline rate of inflation is nearing its target, wage growth and global economic risks add complexity to the decision-making process.
Key considerations include:
- The MPC’s primary mandate is to maintain inflation at or near its 2% target.
- Strong wage growth may contribute to persistent inflationary pressure.
- Geopolitical uncertainties and slower global growth could encourage rate cuts to support economic activity.
Market Expectations
Financial markets currently anticipate around three further BoE base rate cuts in 2025, potentially bringing the base rate down to 3.5% from its current level of 4.25% as of the 8th of May 2025.
However, it’s important to recognise that:
- Market pricing is speculative and not guaranteed.
- Actual decisions will depend on future economic data and global developments.
Mortgage Market Signals
While BoE base rate predictions often make headlines, the mortgage market can provide additional insight into how interest rate expectations are affecting consumers directly.
Most mainstream mortgage lenders base their pricing on swap rates, which reflect market expectations for future interest rates. Recently:
- Several major lenders have reduced mortgage rates significantly.
- Some fixed-rate products are now available below 4%, despite the BOE base rate being higher.
This suggests increased competition among lenders and growing confidence that interest rates may fall in the coming months.
For borrowers, especially those looking to remortgage or purchase a home, this could present opportunities—but it remains crucial to assess the full costs and long-term suitability of any mortgage product.
Remember your home or property may be repossessed if you do not keep up repayment on your mortgage.
Broader Impact on Personal Finances
The interaction between wages, inflation, and interest rates affects more than just mortgage holders. These trends have wider implications for:
- Savings returns
- Investment market performance
- Pension planning
- Household budgeting
Periods of economic transition can create both risks and opportunities. However, it’s important to avoid making hasty changes based on short-term news or market speculation.
The current economic outlook suggests a potential shift in monetary policy, but outcomes remain uncertain. The most effective approach is to ensure your financial plan is robust, diversified, and aligned with your long-term goals.
Key takeaways:
- Stay informed about economic trends, but don’t react impulsively.
- Review your financial strategy regularly to ensure it remains suitable.
- Seek professional, regulated financial advice when considering major financial decisions.
If you have any questions or wish to explore your options, reach out to us.
Information is correct at the date of publication and may be subject to change due to future events. Our team of experts is ready to assist you. please don’t hesitate to contact us on 0333 241 3350 or email info@richmondhousewm.co.uk
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