October slump signals likely rate cut next week

An interest rate cut next week is looking increasingly likely after the UK economy unexpectedly shrank in October.

The Office for National Statistics (ONS) reported that the UK economy shrank by 0.1% month-on-month in October, defying City expectations of 0.1% growth. Following on from a 0.1% fall in September and no growth in August, the latest data is expected to trigger a reaction from the Bank of England regarding interest rates.

"The UK economy has faltered more dramatically than we expected," said Andrew Wishart, a senior UK economist at Berenberg.

"This loss of momentum will bring inflation down more swiftly than we previously anticipated, allowing the BoE to act."

Why did the UK economy shrink in October?

The UK economy unexpectedly shrank in October, which has been attributed to a drop in consumer confidence in the run-up to the Autumn Budget and to car manufacturing failing to fully bounce back following the cyber-attack on Jaguar Land Rover in September.

The ONS reported that much of the economy was "waiting for the outcomes of the budget". The most significant contributor to the overall fall was a 0.3% drop in output from the services sector, a sure sign that both businesses and consumers were taking an especially cautious approach to spending.

Manufacturing is a smaller contributor to the UK economy, but Jaguar Land Rover's unexpectedly slow recovery from its cyber attack meant a rise of only 9.5% in monthly output for the car industry, leaving it 21.8% below August levels.

A drop in car sales also contributed to the economic dip, as did a fall in computer programming and consultancy activities, and a slump in construction output. It marks the fourth consecutive month that the UK economy has failed to grow.

What does a shrinking economy mean for interest rates?

Financial markets are expecting a cut in interest rates at the Bank of England's final 2025 monetary policy committee (MPC) meeting next week.

The Bank has predicted that the government's Autumn Budget policies could cut headline inflation by as much as half a percentage point next year, and Governor Andrew Bailey had said a positive outlook for inflation would allow him to reconsider his vote that decided last month's narrow 5-4 decision to hold rates. In addition, the US Federal Reserve chose to cut its federal funds rate this week by a quarter point.

This all means that a cut was very likely even before news of the latest economic contraction was announced. With that fall priced in, many economists now see a cut as a near certainty or even a necessity to stimulate economic growth.

Suren Thiru, economics director at the ICAEW (The Institute of Chartered Accountants in England and Wales), said: "With these downbeat figures likely to further fuel fears among rate-setters over the health of the UK economy, a December policy loosening looks nailed on, particularly given the likely deflationary impact of the Budget."

Will mortgage rates keep going down?

In a recent poll of 64 economists by Reuters, all expected a quarter-point cut to the Bank of England base rate on the 18th of December and two-thirds predicted another by the end of March 2026, but there was no majority on a timeline for further cuts.

Of course, the actual mortgage rates offered by banks do not exactly mirror the movement of the base rate, with widely expected changes often priced in before the MPC decision is made. The exception is that should the Bank cut rates as expected next week, tracker mortgages will follow the base rate and drop by 0.25% too. This would also apply to most variable deals, though the exact level and timing will be at the lender's discretion.

However, most borrowers are on fixed-term deals, where the interest rate remains the same for a set length of time, so they would not be immediately affected by a base rate cut. When your term is almost up, you will be offered a new rate to renew based on current mortgage market rates. The cost of a fixed-rate mortgage is benchmarked on swap rates, which reflect market expectations for future base rates. Whether this is higher or lower than what you are paying now will depend on whether you are coming off a long or short fixed-term deal.

Some lenders have pre-empted December's potential base rate cut and launched reduced deals already in an effort to get ahead of the market. These providers would be less likely to cut their rates again if the base rate decision is a 0.25% drop. You can find all of the latest top mortgage deals on our 'Best mortgage rates in the UK' page.

If you are interested in learning more about where interest rates might go in the future, check out our article on the latest UK interest rate predictions.

How to get the best mortgage rate

As mortgage rates can change from day to day, the easiest way to check for the best current rate is by using our mortgage rate comparison tool. The tool will find some of the best mortgage interest rates available for the amount you need, based on your loan-to-value ratio. Other factors, including your income, outgoings, credit score and borrowing history, will affect the mortgage deals that you ultimately qualify for.

We provide specific guidance around finding the best mortgage deals in our articles, 'How to get the best mortgage deal' and 'How to remortgage and get the best rate'.

To get the best mortgage rate for your specific needs, you could speak with a mortgage broker who, ideally, has access to the whole mortgage market. Mortgage brokers not only have expertise in understanding how to get the best mortgage rates for your circumstances, but they can also access deals that may not be directly available to consumers.

You can either source a vetted mortgage professional locally using VouchedFor* (also read our article on 'How to find a mortgage broker you can trust') or you can get in touch with the online mortgage broker, Habito*, which has access to deals from over 90 mortgage lenders.

 

 

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