What the latest Bank of England Interest cut means for people and businesses

9th May 2025

Bank of England Cut the Interest Rate to 4.25% Amid Economic Headwinds.

The Bank of England's Monetary Policy Committee (MPC) announced a reduction in the Bank Rate by 0.25 percentage points, from 4.5% to 4.25%, on Thursday, May 8, 2025.

This marks the second interest rate cut this year and comes as the UK economy navigates easing inflationary pressures alongside significant global trade uncertainties, notably new US tariffs.  

The decision by the MPC was not unanimous, with a 5-4 vote. Five members favoured the quarter-point reduction, while two advocated for a steeper 0.5 percentage point cut to 4%, and two preferred to maintain the rate at 4.5%. The move signals the Bank's response to a changing economic landscape, aiming to support growth while guiding inflation back to its 2% target.  

Key Effects on the UK Economy:

Borrowing Costs and Mortgages:
Immediate Relief for Some: Homeowners with tracker mortgages and those on variable-rate deals are expected to see an immediate decrease in their monthly payments.
 
Fixed-Rate Mortgages: While the cut was largely anticipated and priced into current fixed-rate mortgage offers, which have already seen reductions in recent weeks, this move could reinforce the downward trend. However, a dramatic immediate drop in new fixed-rate deals is not guaranteed.

Housing Market: The lower interest rate environment is generally seen as a positive stimulus for the housing market, potentially boosting demand.
 
Savers:
Savers are likely to see a further decline in the interest rates offered on savings accounts, continuing a trend observed with previous rate reductions.

Businesses:
The rate cut is anticipated to provide some relief for businesses, particularly Small and Medium-sized Enterprises (SMEs), by potentially lowering the cost of borrowing. This could free up capital for investment and help offset other rising costs.

Inflation:
The Bank of England acknowledges that inflation has been easing from its recent highs. However, it projects a temporary rise in the Consumer Price Index (CPI) to around 3.5% - 3.7% in the third quarter of 2025, partly due to increases in energy and other regulated prices.

Beyond this temporary increase, the Bank expects inflation to fall back towards the 2% target. The rate cut itself is, in part, a response to an outlook for a slightly weaker economy and lower inflation influenced by factors such as higher global tariffs.
 
Economic Growth (GDP):
The Bank has revised its UK GDP growth forecast for 2025 slightly upwards to 1% (from a previous 0.75%), largely due to stronger-than-expected output in the first quarter. However, underlying economic growth is considered to remain weak.  
The forecast for 2026 has been revised down to 1.25% from 1.5%. The Bank noted that new global trade policies, such as US tariffs, are likely to negatively impact UK economic activity.  

Future Interest Rate Path:
Financial markets are currently pricing in the possibility of further interest rate cuts throughout 2025, potentially bringing the Bank Rate down to as low as 3.5% by the end of the year.

However, the Bank of England has emphasized a "gradual and careful approach" to future monetary policy decisions, which will remain data-dependent and responsive to evolving economic conditions, including global uncertainties.  

HMRC Interest Rates:
HM Revenue & Customs has indicated that interest rates for late tax payments and repayments will be revised downwards in line with the Bank Rate cut.
 
In summary, the latest Bank of England interest rate cut aims to support the UK economy by reducing borrowing costs and stimulating demand in the face of easing but still present inflation and growing international economic headwinds. The effects will be felt across households and businesses, though the precise impact and the path of future rate changes remain subject to considerable uncertainty.