Over the last few weeks, attention has increasingly focused on one question: how quickly will UK interest rates come down?
Markets have oscillated between optimism and caution, but this week’s data and commentary point in a clearer direction. Bank Rate may be heading lower but only so far.
So what does that mean for markets, and for long-term investors?
Rate Cuts Are Likely - But Limited
Interest rates are more likely to fall than rise over the next year, but the scale of those cuts is likely to be modest.
The Bank of England’s latest vote to hold Bank Rate at 3.75% was expected. What surprised markets was how finely balanced that decision proved to be. The Monetary Policy Committee split five to four, with a sizeable minority already pushing for a 0.25% cut.
That narrow margin matters. It tells us that the direction of travel is shifting, even if the timing remains uncertain.
Looking ahead, current estimates suggest:
- a strong probability of one or two quarter-point cuts over the next 12 months.
- a rapidly diminishing likelihood of deeper or faster easing.
- Bank Rate drifting towards what policymakers consider the ‘neutral’ level, rather than moving decisively into stimulus territory.
This reflects the Bank’s updated projections: slower growth, slightly higher unemployment, and inflation falling back towards, and potentially below, target over the coming year.
In short, the case for modest easing is building, but expectations of aggressive cuts remain misplaced.
Why Bond Markets Are Taking This in Their Stride
Crucially, much of this outlook is already priced in.
Markets broadly expect Bank Rate to settle somewhere between 3.25% and 3.50%, a level that is neither restrictive nor especially stimulative. That’s one reason why the probability of cumulative cuts beyond 50 basis points falls away sharply.
For investors, this means:
- short-term rates may ease gradually.
- longer-dated bond yields are likely to remain relatively stable.
- volatility is more likely to come from changing expectations than from the cuts themselves.
In other words, rate cuts alone are unlikely to be a dramatic catalyst for markets, either positively or negatively.
What We’re Doing at TCFP
As ever, we avoid reacting to individual data points or committee votes.
Instead, portfolios are built to remain resilient across a range of rate outcomes:
- maintaining broad diversification.
- balancing shorter-dated and longer-dated fixed income exposure.
- focusing on high-quality assets that can compound through cycles.
- keeping liquidity where it genuinely matters.
Rate expectations will continue to shift, just as they always do.
Our role isn’t to predict every MPC decision.
It’s to ensure your long-term plan stays on track, whatever path interest rates take next.