Bank of England cuts interest rates: Here’s what it means for your money

The Bank of England cut interest rates on Thursday in a move likely to bring relief to borrowers, businesses and hard-pressed consumers across the country.

The central bank reduced its key interest rate from 4.5% to 4.25% at its latest monetary policy meeting amid a backdrop of lackluster economic growth and uncertainty around President Donald Trump’s trade tariffs.

The cut had been widely expected, especially after a slowdown in price rises, with inflation cooling to 2.6% in the twelve months to March (from 2.8% the previous month).

Five of the BOE’s nine policymakers voted for the cut, with two members wanting a larger 50 basis-point reduction, and two wanting to keep rates on hold.

The BOE said Thursday that uncertainty surrounding global trade policies had intensified since the imposition of U.S. tariffs and subsequent retaliatory measures. The “prospects for global growth have weakened as a result of this uncertainty and new tariff announcements, although the negative impacts on UK growth and inflation are likely to be smaller,” it added.

Many British households and firms will be thankful for the rate cut as it will make borrowing money a little less expensive. Savers, who reap the benefits of higher rates of interest on their savings accounts, stand to lose out.

“Just as the response to rate hikes was textbook — slower growth, soft housing market activity and higher saving, the response to rate cuts should also be textbook,” Kallum Pickering, chief economist at Peel Hunt told CNBC Thursday.

“Business and consumers hold significant cash balances while debt-to-income ratios are at multi-decade lows. By easing the brakes on an economy full of pent-up potential, expect a positive response in investment, spending and housing activity,” he said.

Here’s a quick look at the winners and losers from the Bank of England’s latest rate cut:

A 25-basis-point reduction in the Bank of England’s base rate will be a boon for anyone looking to buy a new home and get a cheaper “fixed-rate” mortgage deal from a bank or lender, or for those re-mortgaging and looking for new deals after their fixed-rate term expires.

Residential mortgages with a fixed rate make up the bulk (85%) of existing mortgages, according to data from UK Finance released Thursday. Of the total number of fixed-rate deals, UK Finance analysis shows that around 1.6 million will end in total in 2025, meaning the latest drop in the Bank of England’s key rate will be good news for those looking to find a new offer.

Of course, households that already have a fixed monthly mortgage won’t feel the benefit of an interest rate cut. As of Thursday, the average 2-year fixed mortgage rate was 4.66% while the average 5-year fixed rate was 4.61%, according to data from Rightmove.

A cut is good news for the 591,000 homeowners in the U.K. on a “tracker” mortgage rate, however, that rises or falls with the Bank of England’s base rate. A 25-basis-point cut translates to a £29 reduction in monthly payments for the average customer on a tracker, UK Finance states.

A 25 basis point cut “brings some relief, particularly for those on tracker and variable-rate products, who should see an immediate reduction in monthly repayments,” U.K. mortgage expert Nicholas Mendes from John Charcol in London said in emailed comments.

“While fixed rates have already priced in much of this decision, the cut will support sentiment in the housing market at a time when affordability has been stretched and buyer activity has slowed. It also gives lenders a bit more breathing room to remain competitive, which could help stimulate demand, especially among first-time buyers” he added.

Lower interest rates will also be welcomed by consumers looking to borrow money for other things, with a potential reduction in interest on credit cards and personal loans, although this is dependent on your personal circumstances including credit history.

British firms and consumers will also get some respite from the central bank’s decision, as lower interest rates can also translate into cheaper borrowing and cheaper repayments on business loans, freeing up cash for investment and growth.

Businesses will hope that lower rates will boost consumer confidence and spending, too. This will be a particular bonus for the U.K.’s 5.5 million small and medium-sized enterprises recently hit with a rise in the national minimum wage and higher National Insurance contributions, announced in the Labour government’s budget.

At the same time, however, any wider economic downturn on the back of U.S.-led trade tariffs and export costs and a predicted bump in inflation as energy price rises spike (albeit temporarily) could dent consumer confidence and business sentiment.

“The U.K. economy’s cyclical pulse has been strengthening a little in the last few months. Household incomes have continued to grow faster than inflation and that has been showing up in consumption,” Will Hobbs from Barclays Private Bank and Wealth Management noted Thursday, although he added that “the uncertainty created by the U.S. tariffs will certainly have some dampening effect.”

It means many Brits could be reluctant to splurge the cash, mindful of the still-elevated cost of living after the price of basic goods and energy spiked following the war in Ukraine.

While the pace of price rises has slowed in recent months, the Bank of England warned in March of a short-term spike in inflation this year, mainly due to rising energy costs.

That led the central bank to warn that any interest rate cuts would be “gradual and careful” as it looks to bring the rate of inflation down to its target of 2%. The pace of rate cuts could be subject to change, however, if U.S. trade tariffs dampen global demand and hit U.K. growth more than expected.

“Back in February, the medium-term economic and inflation outlook as well as the balance of risks argued for the BOE to keep the pace at one per quarter for 2025,” Peel Hunt’s Kallum Pickering noted Thursday. “A lot has changed since then — and if there was ever an opportunity to shift the policy narrative, this would be it.”  

“A likely diversion of cheap Chinese goods into Europe, plus lower energy prices due to softer global demand, and lower import prices from a rising sterling will all help to keep a lid on UK prices,” Pickering noted.

“Moreover, an additional fear factor coming from increased uncertainty will likely dampen wage and price setting. In our view, we believe that markets and the broader economy would respond positively to the BOE cutting rates this week and signaling a succession of rate cuts to come.”