In a significant move, the Bank of England has lowered its key interest rate to 4.25% – the lowest in two years. This decision, driven by easing inflation and global trade uncertainties, comes as the UK anticipates a potential trade deal with the US, impacting borrowers, savers, and the broader economic outlook.
In a move widely anticipated yet revealing a divided Monetary Policy Committee (MPC), the Bank of England has lowered its key interest rate by a quarter of a percentage point to 4.25%. This decision, announced today, marks the fourth reduction since August 2023 and positions borrowing costs at their lowest level in approximately two years. The central bank’s action comes against a backdrop of moderating inflation, which cooled to 2.6% in the year to March, but also heightened uncertainty surrounding global trade policies and a somewhat lackluster economic growth outlook.
Governor Andrew Bailey acknowledged the easing inflation as a primary driver for the cut, while also cautioning about the unpredictable nature of the global economy, particularly in light of recent US tariff impositions. The MPC’s vote revealed a nuanced perspective, with five members favoring the 25 basis-point reduction, two advocating for a more aggressive 50 basis-point cut to 4%, and two preferring to maintain the previous rate of 4.5%.
The immediate impact of the rate cut will be felt most keenly by the approximately 600,000 UK homeowners with tracker mortgages, who will see a reduction in their monthly repayments. For the majority of mortgage holders, who are on fixed-rate deals (accounting for 85% of existing mortgages according to UK Finance), the benefits will materialize more gradually, typically upon remortgaging. Industry experts suggest this move could inject some positive sentiment into the housing market, potentially stimulating demand, especially among first-time buyers.
Conversely, savers may see a further dip in savings rates, continuing a trend observed after previous rate reductions. While higher interest rates benefit savers, the current economic climate appears to be prioritizing support for borrowers and businesses.
The cut in interest rates is also expected to provide some relief to British businesses, potentially lowering borrowing costs on business loans and freeing up capital for investment. Many small and medium-sized enterprises (SMEs), which constitute a significant 5.5 million of UK businesses, will welcome this development, particularly as they navigate recent increases in the national minimum wage and National Insurance contributions. The hope is that reduced borrowing costs will bolster business confidence and encourage spending.
Despite the rate cut, the Bank of England remains cautious about the economic outlook. While forecasting a stronger-than-expected 0.6% growth for the first quarter of the year, concerns persist regarding the potential dampening effects of US-led trade tariffs on global demand and the possibility of a temporary rise in inflation to around 3.5% due to increasing energy and household bill costs. The central bank has emphasized a “gradual and careful approach” to future rate adjustments, underscoring its commitment to bringing inflation back to its 2% target.
Adding another layer of complexity to the economic landscape is the anticipated announcement of a UK-US trade deal. While Governor Bailey noted the Bank of England has not been privy to the specifics, he expressed a welcoming stance, highlighting the UK’s position as a “very open economy” that will still be influenced by global tariffs. The potential trade agreement could play a crucial role in shaping the UK’s economic trajectory alongside monetary policy decisions.
Financial markets appear to be pricing in further monetary easing, with expectations of potentially up to three more rate cuts by the end of 2025, which could bring the base rate down to 3.5%. This reflects a growing sentiment that the Bank of England will need to continue adjusting its policy in response to evolving economic conditions both domestically and internationally.
The Bank of England’s decision to cut interest rates reflects a delicate balancing act. Policymakers are navigating the need to support economic growth and provide relief to borrowers while remaining vigilant about inflationary pressures and global economic uncertainties. The interplay between monetary policy and potential fiscal developments, particularly the impending UK-US trade deal, will be critical in shaping the UK’s economic outlook in the months ahead.