The Bank of England has lowered its key interest rate to 4.25%. This is how the change could affect borrowing costs and the housing loan sector and what it could mean if you’re planning to relocate or buy a new home.
Ahead of today’s meeting of the Bank of England’s Monetary Policy Committee (MPC), experts were divided on whether another base rate cut was likely — some anticipated a pause in rate adjustments, while others expected a more aggressive move.
However, it has now been confirmed that the Bank of England has reduced the base rate by 0.25 percentage points, lowering it to 4.25% — the lowest it’s been in two years.
The decision was not unanimous, with the MPC voting 5-2-2. Two members pushed for an even larger rate cut, and two favoured holding rates steady.
The base rate — sometimes referred to as the ‘bank rate’ or simply the ‘interest rate’ — plays a crucial role in determining the cost of borrowing across the economy, including mortgage rates offered by lenders.
The Bank has been using the base rate as a way of taming inflation, which hit a recent peak of 11.1% in October 2022.
The Bank increased the base rate from 0.1% in late 2021, to 5.25% in August 2023. It then cut the rate twice last year, first in August, again in November and then again in February this year.
The good news is that inflation has recently dropped. The Consumer Prices Index (CPI), a key measure of inflation, stood at 2.6% in the year to March. While that’s still above the Bank’s 2% target, it’s edged down from 2.8% in the year to February.
In its Monetary Policy Report today, the Bank said that inflation is “following a bumpy path”.
It explained: “Inflation will increase temporarily this year before falling back to the 2% target. This is partly because of increases in energy prices, and increases in some regulated prices such as water bills.
“Inflation could stay higher than expected if the prices of some services continue to rise quite quickly. On the other hand, demand in the economy could be weaker than expected, which would lower prices.”
How does this impact interest rate predictions for 2025?
The report took a positive yet cautious approach to future base rate changes, stating “If things evolve as expected, we expect to reduce interest rates further.”
“We will judge carefully how far and how fast to cut interest rates. The best contribution we can make to support economic growth and people’s prosperity is to make sure we have low and stable inflation.”
What does the base rate cut mean for mortgage rates?
If you’re planning to get a new mortgage soon, you’re likely to see the lower base rate factored into new deals. This could make moving more affordable for you.
Whether you’re moving, buying your first home or your fixed rate is ending, it’s worth seeing if any lower rates are now available to you.
Key takeaways
- The Bank of England has cut the base rate from 4.5% to 4.25%, its lowest level in around 2 years
- The decision is likely to improve mortgage affordability, paving the way for more people to move house this year
- The base rate, also known as the ‘bank rate’ or the ‘interest rate’, influences the rates that mortgage lenders charge their borrowers
- Today’s decision comes after UK inflation dropped by more than expected to 2.6% in March.