Bank of England cuts base rate to 4%

The Bank of England has cut its base rate to 4%, marking its fifth reduction since August 2024. This move was expected and reflects the Bank’s continued effort to support the economy while managing inflation. 

The latest cut comes amid a backdrop of economic challenges. Inflation remains above the Bank’s 2% target, having edged up to 3.6% in June. Meanwhile, growth remains challenging, unemployment has risen to 4.7%, and global uncertainties, including trade tensions and geopolitical instability, continue to impact market sentiment.  

For borrowers and savers, the cut may bring mixed outcomes. Mortgage rates could ease further, offering relief to homeowners and businesses with variable mortgages or loans. However, savers may see returns diminish as banks may adjust deposit rates downward. 

The Bank’s next scheduled decision is in November. Whether it continues down the path of easing will depend on how inflation and growth evolve in the coming months.

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%.

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.