Jake Miller
The Bank of England has recently cut interest rates to 4%, the fifth reduction since August 2024. This has resulted in lower interest payments for those with loans or mortgages, while those with savings may be paid less interest. The Bank of England's Monetary Policy Committee (MPC) sets the Bank Rate, which is the UK's most important interest rate. The MPC lowers interest rates to increase spending and economic growth, and raises them to reduce spending and control inflation. The Bank of England has stated that it will continue to monitor the economy and global events carefully when making rate decisions, but the future path of interest rates remains uncertain.
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What You'll Learn
The impact on inflation
The Bank of England's main objective is to ensure the UK has a stable financial system. It aims to keep inflation at the government's target of 2%. Inflation is currently at 3.6% and is expected to rise to 4% in September. The Bank predicts a notable improvement in economic growth if spending reverts to normal and savings rates decline.
A change in the Bank Rate affects how much people spend, and overall spending influences how much things cost. Lowering interest rates increases spending, while raising rates reduces it. When the Bank lowers interest rates, it's cheaper for households and businesses to borrow money, but it's less rewarding to save. This can increase demand in the economy and push up inflation. On the other hand, higher interest rates make saving more attractive, reducing spending in the economy and bearing down on prices.
The Bank of England's decision to cut interest rates is influenced by various factors beyond inflation. The economy is struggling to grow, and the jobs market is weakening. The Bank expects inflation to gradually fall due to sluggish wage growth and a tougher jobs market, which will likely lead to households spending less. Additionally, the Bank considers the impact on businesses, as higher inflation can increase operating costs, affecting business decisions such as hiring or cutting staff.
The interest rate cut has a direct impact on mortgage borrowers, especially those on tracker and variable rates. Their monthly payments may decrease, making it cheaper to service their mortgages. However, savers are adversely affected, as the cut in rates drives down the interest paid on savings accounts. This, combined with rising inflation, will erode the value of people's savings in real terms.
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How it affects mortgage rates
The Bank of England's interest rate is what the central bank charges other banks that want to borrow money. This rate is called the Bank Rate, and it is the single most important interest rate in the UK. The Monetary Policy Committee (MPC) sets the Bank Rate to influence other interest rates and keep inflation low and stable.
The Bank of England's interest rate influences the rates that commercial banks charge their customers for loans, including mortgages. So, when the Bank of England lowers its interest rate, mortgage rates tend to decrease, making it cheaper for households to borrow money. This can increase spending and demand in the economy.
The impact of the Bank of England's interest rate on mortgage rates depends on the type of mortgage. For example, those with a standard variable rate (SVR) mortgage may see their repayments decrease when the Bank of England lowers its interest rate. However, lenders are not obliged to reduce their SVRs, and these rates can change by more or less than the Bank of England's rate adjustment.
On the other hand, borrowers with a fixed-rate mortgage will not see any change in their monthly repayments when the Bank of England adjusts its interest rate. This is because the interest rate for these mortgages is locked in for a certain period, such as two or five years.
Additionally, borrowers with tracker mortgages will typically see their monthly payments adjust in line with the Bank of England's rate changes. These mortgages are directly linked to the Bank's base rate, so a reduction in the base rate will immediately benefit these borrowers.
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The Bank of England's Monetary Policy Committee
The MPC's primary objective is to maintain price stability and keep inflation low and stable, typically aiming for a 2% inflation rate as set by the government. By adjusting the Bank Rate, the MPC can influence consumer prices and inflation. When the Bank Rate changes, commercial banks typically adjust their interest rates on savings and borrowing accordingly. For example, if the Bank Rate decreases, commercial banks may lower the interest rates on loans and mortgages, making it cheaper for households and businesses to borrow money, which can increase spending and stimulate the economy. On the other hand, lower interest rates may discourage saving as they provide lower returns.
The MPC's decisions on whether to cut, hold, or raise interest rates are based on various economic factors, including inflation forecasts, wage growth, and market projections. In August 2025, the MPC decided to cut interest rates to 4%, a quarter-point reduction from the previous rate of 4.75%. This decision was made in the context of persistent inflation, which has threatened to slow down the rate-cutting cycle. While the Bank of England has been cutting interest rates since last summer, the path forward is uncertain, and future cuts may be less frequent.
The MPC's decisions have significant implications for individuals, businesses, and the overall economy. For example, mortgage borrowers on tracker or variable rates are directly affected by changes in the Bank of England's base rate. When the base rate decreases, those with loans or mortgages may benefit from lower interest payments, while savers may receive lower interest on their savings accounts. Overall, the MPC's actions influence the cost of borrowing, spending behaviour, and the general economic outlook.
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The effect on the economy
The Bank of England's Monetary Policy Committee (MPC) sets the Bank Rate, also known as the 'Bank of England base rate'. The MPC meets every six weeks to review the economic evidence and make a decision about the Bank Rate. The Bank Rate is the interest rate paid to commercial banks that hold money with the Bank of England.
The Bank Rate influences the rates that commercial banks charge people to borrow money or pay on their savings. When the Bank Rate changes, banks usually change their interest rates on saving and borrowing. However, the Bank Rate is not the only thing that affects interest rates on saving and borrowing. Banks need to pay less on savings than they make on lending to cover their costs.
A change in the Bank Rate affects how much people spend. Lowering the Bank Rate makes it cheaper for households and businesses to borrow money, encouraging spending over saving. This increase in spending can push the accelerator on the economy. On the other hand, raising the Bank Rate increases the cost of borrowing, reducing demand and slowing the flow of new money into the economy.
The Bank of England uses interest rates as a tool to manage inflation. By reducing demand in the economy, interest rates can prevent higher costs from leading to higher prices. The Bank of England aims to keep inflation at the government's target of 2%.
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The future of interest rates
Interest rates are an important aspect of a country's economy, influencing everything from mortgage payments to savings and investments. The Bank of England's Monetary Policy Committee (MPC) is responsible for setting the Bank Rate, which is the single most important interest rate in the UK. The MPC's primary objective is to maintain low and stable inflation, usually set at a target of 2%.
In August 2025, the Bank of England cut interest rates to 4%, the fifth reduction since August 2024, when the rate was 5.25%. This decision was made to curb inflation, which had been rising due to various factors such as the COVID-19 pandemic, the invasion of Ukraine, and worker shortages. The Bank of England governor, Andrew Bailey, acknowledged the uncertainty in the economy and the potential for future rate cuts. However, some analysts doubt that further reductions will occur by the end of the year, citing the cautious approach of the Bank.
For borrowers, particularly those with tracker or variable-rate mortgages, lower interest rates can bring immediate benefits in the form of reduced monthly repayments. On the other hand, savers may experience lower returns on their savings accounts. Overall, lower interest rates tend to increase spending, while higher rates discourage borrowing and encourage saving.
The Bank of England's gradual and cautious approach to interest rate reductions aims to maintain a balance between supporting the economy and managing inflation. While the future trajectory of interest rates is challenging to predict, the Bank remains committed to ensuring stability and responding to economic developments as they arise.
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Frequently asked questions
The Bank Rate is the most important interest rate in the UK. It is also known as the 'Bank of England base rate'. The Monetary Policy Committee (MPC) sets the Bank Rate to meet the government's target of keeping inflation low and stable.
Changes in the Bank Rate influence the rates that commercial banks charge people to borrow money or pay on their savings. If the Bank Rate falls, interest payments on loans or mortgages may get cheaper, but people may be paid less interest on their savings.
Interest rates affect people's daily lives, whether they are running a business or managing a family budget. For most people, interest payments on a mortgage are one of their biggest expenses. Interest rates also affect the cost of spending on credit cards and payday loans and can provide essential income for those who rely on interest payments from savings.
The Bank of England cut its key interest rate to 4% in August 2025. This was the fifth reduction since August 2024.
