Santander forecasts four base rate cuts from the Bank of England in 2025, despite sticky inflation and turbulent bond markets.
Markets expect consumer price inflation will nudge up to 2.7% in December from 2.6% when the Office for National Statistics releases its data on Wednesday, driven by higher food and petrol prices.
This will take the cost of living further away from the Bank’s 2% target.
Meanwhile, lenders are closely following the turmoil in the bond markets before deciding whether to lift mortgage rates.
Sterling was down 0.8% to as low as $1.211 as the yield on 10-year UK gilts — a measure of government borrowing costs — rose 3 basis points to 4.87%, near its highest level since 2008.
Bond markets have taken fright over the impact widespread global tariffs might have if incoming US President Donald Trump carries through his threats.
As part of that assessment, investors are looking again at Chancellor Rachel Reeves’ October Budget plans to spend £70bn over five years and pricing UK borrowing at a higher rate.
Two-year swap rates rose to 4.278% on 9 January from 4.069% a month ago, while five-year rates lifted to 4.147% from 3.810% over the same period, according to Chatham Financial.
These rises will put Bank of England governor Andrew Bailey’s December comments on the expectations of four rate cuts this year under pressure. Many economists now only predict two 0.25% base rate cuts this year.
But Santander holds onto its view that the central bank will cut the rate four times in 2025.
Santander UK chief economist Frances Haque says: “Our own forecasts continue to expect a further four cuts over the course of this year, with base rate ending the year at 3.75%, and remaining between 3% and 4% for the foreseeable.”
However, Haque adds: “This month, we’re already seeing swap rates edge up as they respond to volatility in the bond market, caused by an uncertain economic outlook for 2025 both at home and abroad. As such, lenders may well – in the short-term – nudge up pricing to reflect the higher swaps.
“With just less than a month to go until the next [Bank of England] Monetary Policy Committee announcement, all eyes are on this week’s inflation and gross domestic product data to give some indication of how close the next cut from the Bank will be.
“As it stands, with inflation proving to be more persistent, but with growth weakening, the Monetary Policy Committee is likely to proceed cautiously.”