The Bank of England has announced a base interest rate cut from 4.75% to 4.5%, the lowest level in 18 months.
This is the third rate cut since August 2024, and while it provides relief for borrowers and mortgage holders, financial experts caution that the Bank will take a gradual and careful approach to further reductions.
So, how will this impact mortgages, savings, personal loans, and businesses? Let’s break it all down.
What Are Interest Rates & Why Do They Change?
An interest rate determines the cost of borrowing money and the reward for saving it.
The Bank of England’s base rate is the rate at which it lends money to commercial banks and lenders. This rate influences:
- Mortgage and loan interest rates
- Credit card rates
- Savings account returns
- Business financing
Why Does the Bank of England Change Interest Rates?
The primary reason the Bank of England adjusts interest rates is to control inflation—the rate at which prices increase.
The UK’s inflation target is 2%, and the Bank uses interest rates to manage inflation:
If inflation is too high, the Bank raises interest rates to reduce spending and borrowing. This slows economic growth but helps stabilize prices.
If inflation is low or the economy is slowing, the Bank cuts rates to encourage borrowing and investment, helping businesses and households recover.
Currently, UK inflation sits at 3% (as of January 2025), above the Bank’s target but significantly lower than the 11.1% peak in October 2022.
Will UK Interest Rates Drop Further in 2025?
Market analysts predict further interest rate cuts in 2025, but much will depend on economic conditions and inflation trends.
Key factors affecting future rate decisions:
- Inflation: If inflation falls to 2% or below, more cuts are likely.
- Economic growth: The Bank cut its UK growth forecast for 2025 from 1.5% to 0.75%, raising recession fears.
- Global factors: US trade policies, oil prices, and European economic trends may also influence the UK’s approach.
Rate history:
- August 2024: Rate cut from 5.25% to 5%
- November 2024: Rate cut from 5% to 4.75%
- February 2025: Rate cut to 4.5%
Forecast: If the UK economy slows, expect additional rate cuts—potentially dropping below 4% by the end of 2025.
How Do Interest Rates Impact You?
Mortgages – Lower Rates, But Fixed Deals Still High
According to UK Finance, around 600,000 homeowners have tracker mortgages directly linked to the Bank of England’s base rate.
A 0.25% rate cut saves an average of £29 per month on repayments.
Current mortgage rates (as of February 2025):
- Two-year fixed rate: 5.41%
- Five-year fixed rate: 5.23%
- Tracker mortgage: 5.19%
How This Affects Homeowners:
- Tracker mortgages – See immediate reductions in monthly payments.
- Fixed-rate mortgages – No immediate impact, but new deals may become cheaper later in 2025.
- First-time buyers – May find borrowing slightly more affordable if rates continue to decline.
Tip: If your mortgage deal expires in 2025-2026, start planning early to secure a better rate.
Credit Cards & Loans – Borrowing Costs May Drop
Credit card APRs, bank loans, and car finance rates often lag behind mortgage rates in reacting to Bank of England changes.
Impact on borrowing:
- Personal loan rates may decrease slightly but remain high compared to pre-2022 levels.
- Car finance rates could improve in the coming months.
- Credit card interest rates are unlikely to change significantly in the short term.
What You Can Do:
If you’re considering borrowing, compare lenders now—better deals may emerge as rates drop further in 2025.
Savings & Investments – Lower Returns for Savers
A lower base rate generally means lower savings rates.
Current average savings rates (February 2025):
- Easy-access savings accounts: 3% annual interest
- Fixed-term ISAs: 4.2% annual interest
If you rely on savings interest for income, consider:
- Fixed-term deposits before rates decline further.
- Stocks & shares ISAs for better long-term returns.
UK Interest Rates vs Global Trends
The UK’s interest rates remain one of the highest in the G7, but other central banks are also adjusting rates:
- Eurozone (European Central Bank): Cut rates from 4% to 2.5% since mid-2024.
- United States (Federal Reserve): Holding rates at 4.25% – 4.5%, with further cuts expected.
- UK (Bank of England): Likely to continue reducing rates gradually through 2025.
What this means for the UK:
If global interest rates decline further, the Bank of England may follow suit, lowering rates closer to 3.5% – 4% by late 2025.
What Should You Do Next?
Homeowners & Borrowers:
- If you have a tracker mortgage, expect lower monthly payments.
- If you need a new mortgage deal, shop around for lower fixed-rate offers.
- If you have credit card debt, consider switching to lower-rate options.
Savers & Investors:
- Lock in fixed-rate savings before rates drop further.
- Consider stocks & shares ISAs for long-term growth.
Business Owners:
- Review financing options – Lower interest rates may improve business loan availability.
- Monitor exchange rates if trading internationally, as interest rate cuts can weaken the pound.
Final Thoughts: What’s Next for UK Interest Rates?
The Bank of England’s cut to 4.5% provides some relief for borrowers but also raises concerns about low savings returns and economic slowdown.
Key Takeaways:
✔ Further rate cuts are expected in 2025, depending on inflation and economic growth.
✔ Homeowners and borrowers may benefit from lower repayments.
✔ Savers need to act quickly before interest rates decline further.
Need help navigating changing interest rates? Get expert guidance on mortgages, savings, and financial planning!
📞 0333 023 1300
🌍 www.accountingpeople.co.uk