Expert tips dramatic interest rates cut to 2.75% due to key unemployment and inflation figures

Interest rates could be slashed to 2.75 per cent by the end of summer, driven by rising unemployment, a finance expert has predicted.

Four cuts to interest rates last year brought the Bank of England’s (BoE) base rate down to 3.75 per cent, but Bill Papadakis, of Swiss lender Lombard Odier, believes the Monetary Policy Committee (MPC) will go much further this year.

He is predicting a dramatic slide to 2.75 per cent by the end of summer – effectively squeezing the same amount of reductions as the whole of last year into little more than a seven-month period.

Mr Papadakis suggests that rising joblessness levels and lowering inflation in key areas will lead the MPC to cut at a much faster pace, with pressure on the BoE to “support the economy in an otherwise tough period”.

“Strong wage growth has already slowed meaningfully as the employment picture has weakened,” he said. “Together with falling services inflation, this should translate into lower price pressures, allowing the Bank of England to cut rates to 2.75 per cent by the end of the third quarter – a level close to neutral.”

Neutral interest rates are the point at which they will support the economy without impacting to raise prices. Most experts believe the BoE will not return rates to anywhere near the close to zero interest rates experienced in the decade or so after the global financial crisis.

Business leaders, including the British Chambers of Commerce (BCC), have continually called for deeper interest rate cuts to alleviate pressures on firms experiencing rising costs of employment, business rates and other expenses.

For much of 2025, the BoE governor Andrew Bailey preached the need to take cuts carefully and gradually, so as not to see inflation spike once more following the surges in prices across 2022 and 2023.

Inflation is still at 3.2 per cent, well above the government-set target of 2 per cent, though it has dropped significantly from the July high of 3.8 per cent.

However, Mr Papadakis’ view on the pace of rate cuts – four by the end of the third quarter of the year – is something of an outlier at present.

The MPC are set for votes in February, March, April, June, July and September.

Barclays analysts point out that there is only one round of economic data due before the February meet, making it unlikely there will be enough to demand sequential cuts before and after the new year, so four cut votes in five meetings would be needed to meet Mr Papadakis’ prediction – or at least one vote which called for a double cut of 50 basis points (a 0.5 percentage points cut instead of 0.25 at a time).

The last time a cut of more than a quarter point was voted for was right at the start of the Covid pandemic in early 2020.

Meanwhile, the BoE will need to factor in predicting future outcomes rather than lying on backward-looking data, according to one expert. “The BoE will also be keeping an eye on unemployment, as it creeps above 5 per cent, and also government borrowing, as the interest bill there is a drain on resources that could otherwise be used elsewhere,” AJ Bell’s Russ Mould told The Independent.

“Soggy headline GDP growth numbers for the final quarter of 2025 may also argue in favour of a loosening of policy, especially as the Labour government continues to hike taxes to the potential detriment of growth, although the Bank is really trying to calibrate the appropriate cost of money in 18 to 24 months’ time, as that is how long it takes changes in monetary policy to filter through to the economy. Relying too much on historic data may not be too helpful, in that respect.”

Deutsche Bank’s chief UK economist, Sanjay Raja, said after December’s rate cut that he was maintaining the “long-standing call for two further rate cuts in the first half of 2026”, adding that forward-looking price data and further labour market deterioration could further impact on future cuts. Deutsche are predicting March and June MPC meetings for the cuts, leaving the rate at 3.25 per cent.

Oxford Economics has said the MPC will cut twice across the whole of 2026, opting for April and November. “We expect [interest rates] will end 2026 at 3.25 per cent,” said their chief UK economist, Andrew Goodwin.

Money markets are also pricing in two cuts for the entire year at present.