The Bank of England (BoE) has today lowered the base interest rate by 0.25 percentage points, with the rate now sitting at 4.25 percent. Previously the the rates were held at 4.5 percent.
The decision, taken amid a complex economic backdrop of moderated inflation, stagnant growth, and rising global trade uncertainties, marks a significant intervention that is hoped to reinvigorate our economy as we grapples with yet more lingering challenges.
What does this mean for you?
Borrowers, especially those tied to variable or tracker mortgage schemes, stand to benefit from reduced borrowing costs. An estimated 600,000 homeowners could see reductions in their monthly repayments. The last time there was a cut was in February. Conversely, savers may face diminished returns.
You can use our quick calculator to see how the rate cut affects your mortgage.
Businesses are similarly positioned to benefit from the easing of funding costs. Lower interest rates facilitate cheaper borrowing, thereby enhancing the capacity for capital investment. However, those reliant on exports to the US may find the rate cut doesn't quite go the distance as the tariff situation continues to exert pressure on exporters.
Why have rates been lowered if inflation could rise?
The Bank's monetary policy has oscillated sharply over recent years. In the aftermath of the 2008 global financial crisis and during the subsequent recovery phase, the BoE maintained historically low interest rates, a policy stance that was further intensified by the unprecedented monetary easing during the pandemic years. With rates slashed to 0.1 percent in early 2020, now five years ago, the cuts were aimed to support the economy through the hardest of times. However, as the UK gradually emerged from the lockdowns, the snapback of rising inflation, further exacerbated by supply chain bottlenecks and surging energy prices, necessitated a period of aggressive tightening.
Rates escalated, peaking at 5.25 percent by 2023.
The decision was a 5 member majority vote. 2 members voted for a bigger cut and the remaining 2 voted to hold. Some members perceive the relaxation in financial conditions as sufficient to justify a deeper cut, while others caution that a more aggressive easing might ignite inflationary pressures at a time when global uncertainties loom large. It's a tough balance supporting growth without undermining the very price stability measures that have anchored the economy.
Inflation has cooled somewhat from its peak levels, with recent figures registering at 2.6 percent, slightly above the golden target of 2 percent. The rate cut today comes amidst projections that suggest inflation may briefly rise to 3.5 percent later this year, driven in part by increased costs in energy, water, and other essentials. Coupled with this, forecasts show GDP growth for 2025 hovering around a modest 0.9 percent, a level that signals persistent weaknesses in the economic recovery.
Another log in the fire is that the global trading environment remains erratic, with the imposition of US tariffs on key UK exports intensifying uncertainty in international markets. The combination of these trends has likely pushed the BoE's decision to cut.
Are rate cuts going to continue now?
As the pressures on growth persist and inflationary risks continue to be managed through targeted fiscal measures, the BoE may opt to drive the base rate down to somewhere around 3.5 percent by Christmas. The lowering would be a strategic buffer against future downturns such as external shocks like US trade policies. If inflation starts to rise the October Budget could see tax policy enacted to cool it.