The Bank of England (BoE) has cut its headline base rate from 4.5% to 4.25%.

The Monetary Policy Committee (MPC) voted five to four in favour of a 0.25% rate cut.

Two members voted to hold the bank rate at its current level, while the final two opted for a bigger 0.5% cut in the base rate. 

The MPC underlined what it sees as significant economy issues ahead for the UK economy as the reason for its cut.

However, in its latest forecast it sees inflation rising to 3.7% by the end of this year. Despite this the MPC has pressed on with cuts as it sees the increase in price rises as a temporary phenomenon. 

Dean Butler, managing director for retail direct at Standard Life, part of Phoenix Group, comments: “This is the second significant move by the MPC in 2025 and maybe not the last following lower than expected March inflation and sluggish economic growth. 

“Uncertainties remain around any inflationary impact of April’s employer National Insurance increase, market uncertainty following the US tariffs and wider geopolitical issues however some forecasters predict a series of rate cuts in the year ahead.”

How it affects households

The BoE base rate underpins the cost of debt in the economy and the rewards that savers get for stowing their cash.

Butler adds: “For borrowers, particularly those on variable rate mortgages or approaching the end of a fixed term, today’s rate cut will come as welcome news. Lower interest rates mean reduced monthly repayments, easing financial pressure for many households. 

“However, with ongoing cost of living challenges still front of mind for many, particularly in the context of April’s bill rises, any savings will likely go towards covering immediate expenses rather than discretionary spending. Those with unsecured borrowing like credit card balances may also benefit, though lenders often pass on cuts more slowly in these areas.”

Mortgage rates take some of their cues from the base rate, but it is not necessarily a clear-cut relationship. Much of the market is already priced in ahead of base rate moves thanks to swap rate market and how lenders plan their business. 

“For savers, however, there’s a more complex picture,” Butler continues. “Cash savers may find returns begin to erode in real terms, particularly if inflation remains above the Bank’s 2% target. 

While it’s important to maintain a level of accessible, cash-based savings for emergencies, those with longer-term goals might consider investing to help make their money work harder.”

LISTEN: Mouthy Money podcast on why the Bank is cutting its base rate

Unclear outlook

The Bank’s rate cut comes against a backdrop of rising economic and geopolitical uncertainty. This is thanks chiefly to US President Donald Trump’s ‘tariff war’ and the consequent chaos this caused in investment markets.

However, the UK Government is today due to announce a free trade deal with the US -the world’s largest economy. In recent days it already published details of a deal with India, the world’s fourth largest economy. 

Susannah Streeter, head of money and markets at investment platform Hargreaves Lansdown explains: “Given that the UK economy is decelerating into a dark tunnel of uncertainty, it comes as little surprise that policymakers have opted for an interest rate cut. Decision makers round the table want to avoid [economic] activity grinding to a complete halt. 

“By cutting borrowing costs, they’re hoping to relieve pressure on businesses, stimulate demand in the economy and shine a light towards a recovery. Inflation may still be above target, but deflationary forces are at work, which could have worrisome consequences for growth and are likely to act as a dampener on price rises.”

This explains the BoE’s more aggressive approach, although it has stood back from slashing the rate by a higher amount for now.

Streeter continues: “A recession rather than stubborn inflation is the ogre to avoid right now. The niggling worry of high pay demands looks set to be fading into the background given that hirings have been scaled back by many firms. There is also the chance that an influx of cheaper Chinese-made goods could infiltrate the retail scene and land in virtual baskets. 

“Cut price giants Shein and Temu have increased ad spending in the UK and other parts of Europe, as the US looks like a much more hostile environment. With worries about inflation evaporating and fears about growth rising, it looks like this rate cut could be followed by at least two – and potentially three – more this year.”

Image courtesy of the Bank of England

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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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Interest rates were at an all-time low for a long time. In fact, homeowners may be forgiven for thinking that the rates we saw over the last decade were the ‘norm’, and that current mortgage rates available are ‘excessively high’.

In the UK, interest rates are a topical subject, with speculation as to what will or won’t happen regularly making headline news.  And if the news reports are to be believed, it’s only a ‘matter of time’ until rates start to fall again.

Unfortunately, this may only be part of the story. For most of 2024, journalists have been predicting a drop in the Bank of England base rate (the rate of borrowing that the Bank of England charges to its customers – other banks and lenders).

But what does this mean for borrowers?  Will this signal an instant change in mortgage payments?

Homeowners aren’t borrowing money from the Bank of England; they’re borrowing from a mortgage lender. And a drop in the base rate does not mean that a lender is obliged to pass on a discount.

In fact, if you already have a fixed rate mortgage, that rate won’t change at all until the end of your incentive period.

And if you are on a variable rate, your monthly payment may not drop either, as sometimes your monthly payment is linked to the lenders standard variable rate – and not the Bank of England base rate.

So, when will rates fall?

Current expectations are for the Bank of England to reduce their interest rate at some point this year.  But we also have a general election to navigate and an emergency budget in the autumn which could have an impact on the timing and magnitude of that change.

And don’t forget about the election in the USA. Although this may not seem relevant, in our global economy, the cost of lending is affected by global events!

The other thing to consider is lenders may have already assumed a reduction in base rate. This means that some of the rates available to you today were made available with that potential reduction already in mind.

And therefore, mortgage rates offered across the market if base rate does fall, may not change as much as first-time buyers would like.

What is the new normal?

It’s hard to say what the new ‘normal’ will be, but many commentators expect the Bank of England base rate to settle near 4%. This would give us average mortgage rates of 4.5% – about 1% lower than today.

But the timing of this reduction is critical and brings many questions. What if it takes two, three or even five years to get there? How will house prices change during that time? Are you prepared to put your life on hold while you wait? Is what you may eventually save in interest rate worth the risk of waiting?  

If you’re looking to make that first step on the property ladder you must consider all these factors.

How can Perenna help?

It’s hard to predict the future, but with a Perenna mortgage you don’t need to. If you can afford your monthly payments today, you get the reassurance of knowing you never have to worry about your payments going up.

We also know the question of ‘how much can I borrow?’ can be a top priority. So, we’ve designed a product to help.

With our mortgages, you can borrow up to six times your income, subject to criteria. This could act as a huge boost for those struggling to get onto the property ladder.

Curious about how much you could borrow? Try our mortgage calculator today.

John Davison is head of product, proposition & distribution at mortgage lender Perenna

You could lose your home if you don’t keep up your mortgage repayments.

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