UK Base Rate Cut to 4.75%, But Bank of England Warns Against Expecting Further Drops
The Bank of England has reduced the UK base interest rate from 5% to 4.75%, a decision aimed at supporting economic growth. This rate cut, while expected, may be one of the last in the near term, as the Bank indicates a more cautious stance on future reductions. Governor Andrew Bailey explained that the interest rate is likely to decrease slowly from here on, but significant or rapid cuts aren’t in the cards due to persistent inflationary pressures within the economy. With the recent UK Budget adding additional spending measures, such as a raised cap on bus fares and VAT on private school fees, the outlook for inflation remains uncertain.
The latest rate cut brings mixed news for UK households and businesses. Those with mortgages on tracker or variable rates could see a slight reduction in their monthly payments, though mortgage rates are still considerably higher than they were a decade ago. Average mortgage rates for two- and five-year fixed deals remain above 5%, meaning relief for homeowners may be more limited than anticipated. Meanwhile, savers might experience a decline in interest returns, as banks adjust to the lower base rate.
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The Bank’s cautious approach is driven by concerns about inflation. While inflation had recently fallen below the 2% target, last month’s increase in energy prices raised the likelihood that inflation may climb again. The Bank now forecasts that inflation will only fall back to the 2% target by 2027, a year later than initially projected. This prolonged timeline reflects the broader economic impact of the recent Budget measures. These include higher National Insurance contributions for employers and an increased National Living Wage, both of which could lead to higher costs being passed on to consumers.
Economists like Paul Dales from Capital Economics believe that rates will fall slowly, reaching only around 3.5% by early 2026. This conservative forecast underscores the Bank’s cautious stance in an uncertain economic climate. According to Hargreaves Lansdown’s Sarah Coles, the rate cut is good news for those seeking annuities or higher savings returns, but less favorable for mortgage holders and others reliant on credit. The Bank’s approach is intended to strike a balance, supporting economic activity without sparking further inflation.
In the face of these challenges, many households are feeling the pinch. The Budget’s additional borrowing of £28 billion annually and various tax measures are expected to keep inflationary pressures high, potentially making the cost of living a persistent concern. The Monetary Policy Committee (MPC) highlighted the complexity of managing inflation expectations while supporting growth. With eight members voting in favor of the rate cut and only one dissenting, the Bank is signaling a measured but deliberate approach.
Looking forward, the Bank of England’s message is clear: while some rate cuts are possible, they will be gradual and limited. Bailey’s caution reflects the challenges of controlling inflation in an environment of increased spending and higher wage pressures. As the Bank continues to monitor inflationary trends, businesses and consumers alike are encouraged to manage expectations accordingly. For now, UK interest rates are set to decrease slowly, with significant reductions unlikely in the near term.
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