The decision reflects a delicate balance act the central bank is facing between curbing inflation and supporting growth.

Three members dissented, voting for a rate cut citing a softening labour market and subdued consumer demand.

The MPC noted that underlying UK GDP growth remains weak, while the labour market is ‘loosening’ – i.e. more people are losing jobs.

Consumer Price Index (CPI) inflation is expected to peak at 3.7% in September before stabilising just below 3.5% by the end of 2025.

More from Edmund Greaves

Uncertain picture for household finances

The Bank’s most recent decision is taken against a persistently unclear outlook for households to plan against.

Most watchers believe it will cut its rate to 4% in August, eventually reaching 3.5% some time next year. But the MPC has taken a ‘two steps forward, one step back’ approach for some time, disappointing mortgage holders in particular.

Nicholas Hyett, investment manager at Wealth Club explains why the situation is so complicated: “The Bank of England’s goal over the last two years has been to slowly bring down inflation without crashing the economy – achieving a so-called soft landing, that’s not easy at the best of times let alone when the economic data is unreliable.

“Official data suggests the Bank has so far done a pretty good job, with the UK labour market holding up well. The problem is that data has never been more unreliable, and elsewhere there are signs of strain. Just this morning recruiter Hays said that it is experiencing significant weakness, with a 13% revenue fall in UK & Ireland as hiring for permanent positions softens.

“Inflation numbers too are subject to uncertainty and had to be restated last month after an error in the data. Conflict in the Middle East risks higher energy prices potentially pushing inflation higher – though calling the course of events there is almost certainly a mugs game, and the Bank has said that under current conditions it expects inflation to remain broadly at current levels for the rest of the year.

“The risk is that all the uncertainty leaves the Bank paralysed, with rates stuck at their current level. With uncertain data, policy setters will need a really compelling reason to hike or cut interest rates and that could result in default driven decisions.”

Photo credits: pexels

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Inflation has increased to 3.5% on the Consumer Price Index (CPI) measure of inflation according to the Office for National Statistics (ONS).

The rate at which prices rise on average has increased by more than anticipated, up from 2.6% in March 2025.

Chief among price rises leading the rate higher were energy prices (thanks to the increase in the energy price cap), transport cost increases and household services.

Core inflation – which removes more volatile prices such as for food, energy, alcohol and tobacco – increased by 3.8%, while prices for services rose by 5.4%.

More from Edmund Greaves

Bank of England and Government under pressure

The unexpectedly high increase in inflation has put pressure on the Bank of England and the Government – both of whom have a critical role in managing both price rises and economic growth.

The Bank of England last week cut its base rate to 4.25%. But this week the Bank’s own chief economist Huw Pill warned that it would have to slow its pace of cuts in order to ensure it does not lose control of inflation again.

Before the most recent inflation report, investment markets anticipated that the bank rate would fall to 3.5% by the end of the year. But it has reined in this forecast to an average expectation of 3.9%.

The Government meanwhile is coming under renewed pressure as April’s spike was affected by increases in National Insurance, living wage levels and other tax increases such as council tax.

Bad news for savers and mortgage buyers

The spike in inflation is also potentially bad news for both savers and mortgage buyers.

Savers now face falling rates thanks the Bank of England base rate cuts while inflation steadily eats into their savings returns. While savers can still find inflation-beating rates on the market, the number of accounts is dwindling as providers cut their offers.

Mortgage buyers have benefited from recent cuts in the mortgage market as lenders attempt to position themselves more competitively while the base rate comes down.

But with the pace of cuts now in doubt, it is likely that the number of improved deals could slow precipitously.

Savers need to consider if their long-term savings might be better put to use via investments, while mortgage shoppers should ensure they are looking for the best deal possible and speaking to a broker who can help find the best mortgage for their situations.

Photo credits: Pexels

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So, they’ve done it again! Cut the base rate! Looks like more to come too this year. We could be at 3% by 2026 (if my own back of a packet calculations are anything to go by). This could do wonders for my house price.

The truth at this point is it doesn’t really directly affect me all that much. I’m one of those smug a*******s who locked in low for long back in 2022. 

But my renewal is up in 2027 and things are certainly moving the right way for that. But there is something else about my house that this news will be good for – how much its worth. 

Low rates, high prices

Here’s how things work (at least in theory). When rates are high(er) there is less money in the system looking for a home. More of it is locked up in savings, or spent paying down expensive debts.

But when rates are low – as was the norm from around 2009 to 2022 – then savers struggle to find a good place to park their cash so as to beat inflation. This leads to an asset price boom.

One of those assets which did particularly well is property – housing.

But for those of us who bought just as this boom was ending, i.e. when rates were soaring upwards, this hasn’t been the story.

House prices, broadly, have barely moved. I can’t be the only homeowner who gets the monthly Zoopla email telling me how much my house is currently worth.

Although how online data is able to tell me that with significant accuracy (Zoopla if you’re reading this please drop me a line!), my home’s value has bobbled up and down around what we paid for it for around three years now.

LISTEN: Mouthy Money podcast on why the bank rate is falling

Property market bonanza

Are we about to have a property market bonanza? Perhaps not. The economy is near enough in the bin. This isn’t making it easier for people to cobble together deposits, moving costs, stamp duty fees and everything else.

But the FCA is looking at easing mortgage criteria which should bring more buyers onto the market.  And the more rates get cut the cheaper mortgages will be and the better this will support house price rises. 

We’ve also actually experienced something of an affordability reversal as workers have seen their wages rises substantially in the past two years, while property prices have stood still.

For my part, we’re not going anywhere for now so the value of the house is sort of irrelevant. The least I can ever hope for is not to be in negative equity. 

Are the heady days of soaring house prices coming back for homeowners? Time will tell. 

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The Bank of England has ended the biggest ‘will they/won’t they’ since the finale of Friends.

It has cut its base rate down to 5% – a measly 0.25% cut. The decision was also finely balanced with 5-4 in favour of a cut.

The message from the Monetary Policy Committee is clear – the route down is going to be softly and slowly. A big departure from the big squeeze it undertook when hiking in 2022-23.

But where do the cuts end? Are we set to return to the mind-bogglingly-low rates of the 2010s?

The natural rate

What the Bank of England has to figure out is what is called the ‘natural’ or ‘neutral’ rate of interest. This is an ideal policy level in which the economy doesn’t grow too quickly (overheating and causing inflation then a crash) or too slowly – leaving everyone not better off.

Essentially it neither overstimulates nor restricts economic activity. But in practice finding this natural rate is tricky.

What is curious is the bank is cutting rates despite the fact that wages are growing strongly and GDP is ticking up better than expected. This suggests they’re now pre-empting a situation where rates are too high – which is liable to ultimately lead to unemployment and an economic crash.

All things being equal the natural rate of interest will be above 2010s standards, but potentially not that much higher.

So while we shouldn’t expect a return to the era of cheap debt any time soon, barring another bout of inflation we should expect rates to gradually reduce to a level which households, businesses and the economy at large find more accommodating.

Hopefully then, this is good news today. Although for many with mortgages on high rates or renewing, it might not feel it. Better times (tax hikes aside) lay ahead.

Photo credits: Pexels

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Since when were decent wage rises a bad thing? Since this week it would appear.

As of January to March this year, according to the figures release on Tuesday by the Office for National Statistics, wages rose (excluding bonuses) by 6%.

Taken against the current CPIH inflation (the ONS’s preferred measure) of 3.8% and we’ve got 2.2% real terms pay increase, on average, for British workers. This means Brits are getting a proper pay rise for the first time in many years.

Now, we last had real-terms wage rises in 2021, so it wasn’t that long ago – but this was mostly cancelled out by monstruous inflation in 2022/23. Collectively even if we’re getting pay rises in earnest, there is still some way to go to get back ahead of the price increases we’ve all felt.

There is a longer-term story here though and the ONS’s own figures illustrate this. In the graph below, you can see real pay growth vs CPIH inflation.

When the blue and orange lines are higher than the zero-axis line, this means real pay was growing. The post-2008 drop off is clear, and there has been no consistent reversal since despite a couple of spikes.

This is confirmed by research from from the Trade Union Congress (TUC), whose recent figures suggest real pay hasn’t really moved in about 16 years. The TUC says the average worker in the UK would be £200 a week better off if pay had grown at the same as its pre-financial crisis rate.

What is going on here? And why are real-terms wage increases (i.e. people becoming better off) treated like a bad thing by the Bank of England and other vested interests?

Read more by Mouthy Money editor Edmund Greaves

Why we all got poorer

The reason why the news of strong wage growth is being touted as bad news is because it is evidence of a ‘wage price spiral’.

In effect, wages are rising due to a labour shortages and workers being more assertive in the face of soaring costs.

But productivity (i.e. how much the average worker makes) isn’t increasing at the same time. So we’re being paid more but not producing more as a result.

Economists treat this kind of wage increase as ‘inflationary’ because it means the economy isn’t actually growing, there’s just more money sloshing around inside it.

This means the Bank of England, which watches all of this very closely, is likely to maintain its bank rate higher as a result. The bank is worried that if we’re getting more pay rises then we’ll just spend it and this will perpetuate more price rises.

But maybe…just maybe…the reason that people are getting proper pay rises now is because we’ve had enough of below inflation pay settlements and have finally found our collective voices. We’re tired of the erosion of our living standards and now we have the power to say enough is enough.

The 2010s were a decade marked by below-inflation pay rises. This was a core pillar of austerity government and a deliberate policy decision our leaders made.

The idea was this – in the post-GFC world government and big business couldn’t afford to hand out pay rises that matched inflation, and needed to control costs because, well, they were pretty broke.

This led to a novel idea whereby instead of saying to workers “no you can’t have a pay rise this year” you gave them a pay rise, but you give them an under-inflation pay rise. For example, if inflation was 3% – you’d give your employee 1.5%. It’s something and enough to quieten any immediate discontent.

But it is in effect a cost-cutting measure as over time it will reduce the business/government salary bill as income from goods and services (or taxes!) rises.

It is a way of softening the blow while also making the balance sheet look better.

It is a boiling frog strategy.

This idea was the lovechild of behavioural economists, illustrated in the book Nudge (published in 2009) and the ‘Nudge Unit’ which was created by the Coalition Government in 2010.

It became a widespread tactic used by Government entities and businesses all over the UK to slash their wage bills.

It was so effective the economy had basically become addicted to it, as the ONS wage data shows all too clearly. This attitude reached its perverse peak in 2022 when Bank of England Governor went to the press to beg workers not to ask for pay rises.

The Russian invasion of Ukraine was days away at this point, and the ensuing energy crisis turbocharged the inflation crunch. But that crunch was ultimately the product of the Bank of England, in cahoots with the Government, printing money into oblivion to pay for the pandemic.

And this leads us to today, where the labour market is tight, workers are getting actual pay increases and the economic ‘theory’ for getting away with meagre pay rises appears dead in the water.

It is bad news, but only if you’re a bean counter who doesn’t care about the human cost of eroding people’s earning, a business owner seeing your profits curtailed, or a government finding it harder to limit costs. Sound familiar?

At this point, if higher wages means higher rates then so be it. The era of (effectively) zero rates should never return as an idea anyway because it promoted irresponsible borrowing and an unhealthily debt-fuelled economy. It caused the inflation that has had to be confronted.

Higher rates will enforce financial discipline on business, government and households, and that is ultimately not a bad thing.

Photo by Robert Bye on Unsplash

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Must know money focuses on the financial news you need to know. Here’s why inflation falling unexpectedly it matters.

Inflation has surprised with a small drop, slowing to 6.7% on the consumer price index (CPI) measure.

The fall was largely as a result of what the Office for National Statistics (ONS) calls “erratic” cost of overnight accommodation and air fares which both saw falls in August.

Food prices are also rising more slowly than 12 months ago.

The inflation figure has surprised everyone because rising petrol and diesel prices were predicted to be enough to send the index up.

But this wasn’t the case in the end as fuel price increases didn’t outweigh other falls.  

Why does inflation matter?

Inflation tracks the speed at which prices of everyday products and services rise and give us a good indicator of what is happening in the economy.

Lower inflation doesn’t mean prices are falling. They are still rising, just a little more slowly than before.

This is also measured in pure averages – the individual costs of things you muy and how those prices change vary enormously by your own experience.

Broadly, when inflation is too high, everyone has too much money chasing too few goods and services. This can “overheat” the economy and cause a recession.

Experts are now worried that wage growth, which is outpacing inflation for the first time in many years, will help to embed fast-rising prices for longer.

This is all well and good, you say, but I’ve got a pay rise and it is a relief to have more money. And that is true.

But inflation has already damaged the economy in the past two years and made life more expensive for everyone beofre pay rises even began to catch up.

Economists are (often rightly) accused of not thinking about how real people react to such events, but they will tell you that gentle rising inflation and gently rising wages are much less problematic for the economy, and much more sustainable.

Inflation and wages ultimately dictate what level the Bank of England sets its base rate of interest at. The higher that rate, the more expensive financial products such as mortgages and loans will be for families.

The next time that happens is tomorrow when the bank could well raise rates to 5.5%.

Photo by Martin Péchy.

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Homeowners face higher mortgage repayments as Bank of England governor Andrew Bailey has warned of interest rate hikes.

The Bank of England – which oversees the rate of interest on the supply of money in the economy – could be forced into hiking rates above historic lows. It expects inflation to head above 4% by the end of 2021.

A rise in interest rates

Bailey has given no indication of when he expects the increase in interest rates, currently at a record low of 0.1%. But the Bank’s Monetary Policy Committee (MPC) is set to meet in November to decide what to do.

In the meantime, banks are pulling their cheapest mortgage deals off the market in expectations of a rate rise:

• Barclays has already adjusted some fixed rate deals.
• Nationwide Building Society confirmed it is “reviewing” its mortgage pricing.
• Lloyds, the owner of Halifax and the UK’s biggest mortgage lender, has also made some fixed rate deals more expensive.

“If 0.5 percentage points is added to mortgage interest it adds about £50 a month to the cost of a £200,000, 25-year mortgage, or around £120 a month extra to a £450,000, 25- year mortgage”

Laura Suter, head of personal finance at AJ Bell

Financial experts say this behaviour is to be expected – where major banking institutions pull cheap financial products and hike rates on others in anticipation of an interest rise which hasn’t happened yet.

As a result of potential hikes, the annual cost of the nation’s mortgages will rise to a total of £14 billion, with those on tracker mortgages being most affected by a rise in interest rates.

Laura Suter, head of personal finance at AJ Bell, said: “Mortgages rates have been at rock-bottom lows for a long time and many homeowners have never known an environment of higher interest rates, so any rise will be a nasty shock for them.

“And be warned, mortgage providers don’t hang around when it comes to passing on rate rises, so anyone on a tracker deal will see their costs go up immediately.

“If 0.5 percentage points is added to mortgage interest it adds about £50 a month to the cost of a £200,000, 25-year mortgage, or around £120 a month extra to a £450,000, 25-year mortgage.”

Low interest rates vs high interest rates

If interest rates are low, this makes borrowing cheaper and it encourages individuals and companies to borrow more and spend more money.

However, if interest rates are high, this means people get better interest payments on money in a savings account, but it will make borrowing more expensive.

Pete Mugleston, managing director and money expert at OnlineMoneyAdvisor says: “If you’re someone who has a tracker mortgage that is in line with the base rate of the Bank of England, it’s likely you’ll see an immediate impact on your mortgage repayments as interest rates rise.

“It’s also likely that the extra money you’ll pay will only cover the increased interest charges, so although you’ll be paying more each month, you won’t actually be clearing any more of your mortgage debt.”

How does this affect your finances?

Consumers are impacted through increases to their credit card and mortgage interest rates, especially if these loans carry a variable interest rate.

Consumers still have to pay their bills. When those bills become more expensive, households are left with less disposable income.

When consumers have less discretionary spending money, businesses’ revenues and profits decrease.

Mugleston says: “The UK is still trying to recover from a very difficult 18 months, where many people were out of work and therefore struggling to pay their bills.

“Let us not forget that energy bills will also be rising in the coming months and universal credit is being cut back to its pre-covid pay out, even though the poorest may not have financially recovered just yet.

“I’m also doubtful as to whether wages will increase to match inflation, so quite frankly this couldn’t have come at a worse time.”

How to prepare for rising interest rates

Those on a standard variable rate (SVR) mortgage will probably see an increase in their rate in line with any interest rate rise. An impact on your finances can be avoided if you:

• Find out what mortgage you’re on and look for a fixed deal
• Make sure you’re on the best mortgage deal
• Work out how the interest rate will affect you
• Make a financial plan
• Ask for help from a debt advisor
• Boost your credit score to remortgage
• Overpay your mortgage when interest rates are low

Mugleston adds: “When it comes to the cost of living, a rise in interest rates means the price of everyday expenses will inevitably increase; making it more expensive for the average person to maintain the lifestyle they’re used to, thus lowering purchasing power.

“It’s not just our everyday expenses that will be affected, as money put away into your savings, pensions or any other investments could also be lowered.”

Photo by Towfiqu barbhuiya on Unsplash

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