Bank of England base rate cut to 4.25%

Today’s cut in the Bank of England base rate, from 4.5% to 4.25%, represents the third cut in the past six months. This takes the base rate back to the level it was two years ago, in May 2023. The downward trend in interest rates has been responding to the downward trend in inflation. Today’s cut had been widely anticipated and will already have been reflected in reduced rates on many saving and mortgage products.

The Bank of England acknowledged that there is “heightened unpredictability in the economic environment”, and that it has no “pre-set path” for future rate movements. The Bank’s next decision will be on 19 June 2025. 

The Bank of England can trace its roots back to 1694 – only two years further than Aviva. (Aviva’s ancestor, ‘Hand in Hand’, was established in 1696). It’s owned by the government, but has operated on its own since 1997. The Bank of England has a responsibility to control inflation and support economic stability in the UK. 

Setting its ‘base rate’ is one of the most important methods the Bank uses to meet these responsibilities. The base rate is the interest rate that the Bank charges on loans it provides to commercial banks and other financial institutions. But this base rate ripples through the wider economy and influences the interest rates available to individual savers and borrowers. These interest rates can then help shape the performance of the wider economy. So although it may seem distant, the Bank’s actions can impact almost everyone in the UK.

The Bank’s Monetary Policy Committee (MPC) meets about eight times a year, and its nine members vote on whether they believe the Bank’s base rate should increase or decrease. In the event of a tie, the Governor of the Bank has the deciding vote. 

In very simple terms, if the Bank is concerned that the UK economy could be slowing down, it may vote to reduce its base rate. In doing so, this should make borrowing cheaper, and therefore boost spending and investing, and boost the wider economy. However, if the Bank is concerned that the economy could be overheating, with the risk of escalating inflation, it may vote to increase its base rate.

For most of the 2010s, the base rate decisions of the Bank of England received little attention, when the base rate sat below 1%.  But things are very different today. Three years ago, inflation accelerated to a 40-year high (11.1%), and this led to the Bank raising its base rate above 5% for the first time since 2008. Today, the base rate is at 4.25%.

This week’s meeting of the MPC comes at an uncertain time in the world economy. 

In March, the UK’s inflation rate eased to 2.6%, but there is an expectation that it could rise again in April, due to increases  in many utility bills and national insurance. Increasing inflation would be a reason for the Bank to raise its base rate.

Events beyond the UK, however, may be of more interest to the MPC – in particular, the recent tariff actions of the US government. These have led many economists to predict  a slowdown in the global economy, as higher tariffs can lead to lower trade. In April, for example, the International Monetary Fund downgraded its 2025 growth forecast for the UK, from 1.6% to 1.1%. A slowing economy would be a reason for the Bank to consider lowering its base rate.

A change in the base rate, up or down, can have implications for the interest rates applying to savings, such as bank accounts, ISAs and on borrowing products, such as mortgages. However, any change in the base rate may not necessarily happen  immediately and equally reflected in these products. 

As well as this, product providers typically don’t wait for the Bank to decide before making their own rate changes. Most are continuously anticipating future movements of the Bank in a bid to offer competitive products. Many product providers may have factored future movements in the base rate into the interest rates they offer. There has already been evidence of falling saving rates and  mortgage rates over recent months  with expectations of future cuts in the base rate.

That said, this doesn’t mean customers should ignore the actions of the Bank. Interest rates today are at a level not seen for more than a decade. Indeed, some younger customers may never have experienced rates at today’s levels. Interest rates now have greater importance for peoples’ personal finances than has been the case for many years.

Here are my top three tips:

1. Don’t panic: Financial decisions made under stress are rarely good ones. And many financial decisions do not need, or benefit, from instant action. Today’s movement in the Bank’s base rate is marginal, so the immediate impact on personal finances may also be marginal.
2. Shop around: If you are a saver or borrower, it’s now important shop around. The right product, at the right interest rate, could significantly boost your finances over the longer term. 
3. Maximise your tax advantages: Products like ISAs and pensions carry tax advantages, to encourage you to save. For example, interest received on other savings products may carry a tax liability, while you receive tax relief on ISAs and pensions. This could make your money go further. And when interest rates are high, these tax advantages are even more advantageous.

Tax benefits are subject to change, interpretation and depend on the individual’s circumstance.

Please be aware that the value of an investment can fall as well as rise, and you could get back less than you put in.