In a highly anticipated move, the Bank of England is expected to cut interest rates to 4%—the lowest level since March 2023—according to financial market forecasts. The decision, set to be announced today at 12:00 BST, could bring some relief to mortgage holders, but might spell further disappointment for savers.
This would mark the fifth consecutive reduction in the Bank of England base rate since August 2024, signaling a shift in monetary policy aimed at stimulating a sluggish UK economy.
Why Is the Bank of England Cutting Rates Now?
Despite inflation climbing above the Bank’s 2% target, reaching 3.6% in the year to June, the central bank is opting for a more accommodative stance. The decision comes amid a cooling labour market, weaker consumer spending, and signs of economic stagnation.
Data from the Office for National Statistics showed that the UK economy failed to grow in both April and May, with GDP contraction sparking concerns about a potential recession. While the economy grew 0.7% in Q1 2025, momentum has clearly slowed in Q2.
By cutting the Bank of England base rate, policymakers aim to lower borrowing costs, thereby encouraging both household consumption and business investment.
What Does This Mean for Homeowners and Savers?
If the rate cut materializes, the Bank of England interest rate will fall to 4% from 4.25%. For mortgage holders, especially those on standard variable rate (SVR) deals, this could translate into modest savings. According to Moneyfacts, repayments on a typical £250,000 mortgage over 25 years could drop by approximately £40 a month.
However, savers will feel the pinch. Average savings rates have already declined from 3.9% in August 2024 to a projected 3.5%. Rachel Springall, finance expert at Moneyfacts, warned, “Savings rates are getting worse, and any base rate reductions will spell further misery for savers.”
This underscores the double-edged nature of interest rate cuts: while they ease debt burdens, they simultaneously reduce income from interest-bearing savings accounts.
Inflation: A Balancing Act
Critics argue that cutting rates while inflation remains above target could be risky. Rising prices, particularly in food, clothing, and travel, have squeezed household budgets. However, wage growth has moderated to 5% between March and May, while employment indicators such as vacancies and payroll numbers have declined—suggesting that inflationary pressures may be easing.
The Bank of England base rate remains a key tool in managing inflation expectations. By adjusting the cost of credit, the Bank can attempt to steer the economy back toward its 2% inflation target while avoiding a hard landing.
What’s Next for the UK Economy?
Chancellor Rachel Reeves is expected to address the country’s fiscal outlook in the upcoming Autumn Budget. Analysts forecast a potential £41 billion spending gap, which could lead to tax rises unless offset by economic growth.
With today’s expected rate cut, attention will soon turn to how the broader economy performs in Q3. The next set of GDP figures, due next week, will be closely watched by investors, economists, and policymakers alike.
If economic weakness persists, further adjustments to the Bank of England interest rate may be on the table—though likely with caution, given the lingering inflationary risks.
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