Market analysts anticipate gradual easing of borrowing costs
Interest rates in the UK could dropto as low as 3% by the end of next year, according to several economists from the City AM Shadow Monetary Policy Committee (MPC), though ongoing economic challenges may keep borrowing costs elevated for some time.
The Bank of England recently opted to keep the base rate at 4%, citing persistent inflation, which stood at 3.8% in August. Members of the Shadow MPC expressed differing opinions on the future path of interest rates, reflecting the difficulty in predicting when inflation will reach the bank’s 2% target.
Of the nine economists on the Shadow MPC, four anticipate that rates could fall to 3% by the end of 2026. Others expect a more gradual reduction, with some forecasting only one or two further cuts.
Debate continues over the so-called “neutral” interest rate—the level at which monetary policy neither stimulates nor restrains price growth. This rate can vary between countries, and the UK’s current economic conditions may require a higher neutral rate than elsewhere. Market expectations suggest rates could settle around 3.5 %, though some analysts believe the central bank may refrain from further cuts.
Interest rates could fall to three per cent – City AM Shadow MPC https://t.co/ckcUCITcoq
— City A.M. (@CityAM) September 18, 2025
Looking ahead to the Bank of England’s November meeting, economists remain divided. The MPC itself is split, with conflicting data on the labour market and inflation complicating the outlook.
The Shadow MPC members also provided a range of views on where rates will ultimately settle.
Anna Leach, chief economist at the Institute of Directors, expects rates to stabilise between 3.5 and 3.75%, noting that uncertainty remains due to factors such as technological change. “There’s significant uncertainty as the UK arguably has yet to clear the impact from the pandemic and the outlook for trend growth – particularly with the emergence of AI – is highly uncertain,” she said.
Ben Ramanauskas, senior research fellow in economics at Policy Exchange, anticipates a fall to 3%, citing labour market weakness and fiscal pressures. “Given the deteriorating state of the labour market, the damaging impact of further tax hikes, and continued uncertainty and instability, inflation is likely to return to target more quickly than forecast by the bank,” he commented.
Jack Meaning, chief UK economist at Barclays, foresees a range of three to 3.5%, warning that delays in easing could require further action if economic growth slows. “The MPC acknowledges this uncertainty and is wary of it, so I would expect it to end the easing cycle to the top of this range, at 3.5%,” he said. “There is a risk that they take too long to reach this neutral level though and ultimately have to go further to offset a slowing economy.”
Jonathan Haskel, professor of economics at Imperial College Business School and former MPC member, agrees with a 3.5 % estimate, suggesting that productivity gains from AI could keep rates slightly higher.
Julian Jessop, independent economist, bases his 3.5% projection on inflation and growth metrics. “A ‘neutral’ level of interest rates would probably be around 3.5%, based on inflation of two %and real economic growth of 1.5%,” he said.
Kallum Pickering, chief economist at Peel Hunt, expects a 3.75% rate due to ongoing inflationary pressures. “Persistent inflation pressures linked to supply-side challenges and robust domestic demand indicate that monetary policy will need to remain slightly tight for the foreseeable future,” he remarked. “My 3.75% best-guess is a notch above my 3.5% estimate of neutral.”
Katharine Neiss, chief European economist at PGIM Fixed Income, supports a 3% rate, citing a lower neutral rate and signs of a cooling labour market.
Ruth Gregory, deputy chief UK economist at Capital Economics, also suggests a 3% rate, pointing to the impact of a weaker labour market on inflation. “Bank rate may still need to be reduced to 3% next year, instead of 3.5% as investors expect,” she said.
Vicky Pryce, chief economic adviser at the Centre for Economics and Business Research, believes a slowdown in inflation could allow for rates to fall to 3%.
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