Interest rates have dropped to 4% from 4.25% following the latest meeting by the Bank of England’s Monetary Policy Committee (MPC).
The 25 basis-point reduction was passed after two rounds of voting by a slim majority of five votes to four, with the dissenters preferring to keep rates steady. It is the fifth time in 12 months that the Bank has cut rates and the third so far in 2025.
A statement from the Bank of England (BoE) said: “There has been substantial disinflation over the past two and a half years, following previous external shocks, supported by the restrictive stance of monetary policy. That progress has allowed for reductions in Bank Rate over the past year.”
This is despite acknowledging that the risk of inflation creeping back up is higher than it was in May. It highlighted the 12-month Consumer Price Index (CPI) reading, which increased to 3.5% in the second quarter of 2025 due to higher energy and food prices, and forecast CPI to peak in September at 4%, double the Bank’s 2% target, before falling back afterwards.
Meanwhile, pay growth remains elevated, although this has declined recently and is expected to slow during the remainder of the year.
Zara Nokes, global market analyst at JP Morgan Asset Management, said anything other than a 25 basis point rate cut “would have been a huge surprise”.
“The labour market is quite clearly deteriorating and nervousness about potential tax rises in the autumn will only add to growth headwinds,” she said.
Its main target appears to be the economy, with unemployment rising and growth slowing after what Richard Carter, head of fixed interest research at Quilter Cheviot, called a “false dawn” in the first quarter of the year.
The jobs market is under pressure from higher employment costs, with unemployment ticking higher to 4.7% at the latest reading, while the estimated number of vacancies in the UK fell by 56,000 on the quarter, to 727,000, in April to June 2025.
This, coupled with tax rises on the horizon, lacklustre consumer spending and low consumer confidence paints a bleak picture for the UK economy.
“With today’s cut in interest rates it appears the Bank of England is getting increasingly concerned about the health of the UK economy. As such, the BoE, while still concerned about its level, is putting inflation fears on the back burner as it looks to provide some relief to businesses and consumers,” said Carter.
George Brown, senior economist at Schroders, noted it is a difficult time for the Bank of England, with jobs, growth and inflation figures all calling for different policy decisions.
“Given the uncertainty presented by the conflicting data, the committee is right to stick to its ‘gradual and careful’ mantra,” he said.
Will more cuts follow?
There was a wide range of forecasts on future rate cuts from experts following the latest decision, with some expecting the Bank to continue to cut, while others were less convinced.
Nokes said that delivering a rate cut in September could be “optically challenging” with inflation expected to pick up, despite the labour market “quite clearly deteriorating” and nervousness about potential tax rises in the autumn only adding to “growth headwinds”.
Brown said November may be more likely, as “nervousness about the labour market” could prompt further action. However, he noted this will be “difficult to justify” unless disinflation is “clearly underway”.
“As such, we think there is a decent chance rates will not fall below the current rate of 4% this year,” he said.
Lale Akoner, global market analyst at eToro, echoed this sentiment, noting that a November cut is “far from guaranteed”. “From here, the path will likely be uneven. Credibility matters and getting this wrong could cost more in the long run,” she said.
Carter was more bullish on rate cuts, suggesting the market is hoping there will be more this year.
“The problem facing the UK is that the issues show no signs of abating. Speculation is rife about which taxes will be next to be raised at the upcoming Budget and that is likely to weigh further on growth and consumer confidence, just as it did last year,” he said.
“This should all point to a reduction in interest rates going forward too, just as we have seen in Europe,” he added, although the UK is battling inflation that is not present on the continent.
Luke Bartholomew, deputy chief economist at Aberdeen, was another in the camp expecting more rate cuts in 2025. While battling growth and inflation, he said he expects “the weakness of growth to win out and for the Bank to cut rates again later this year and then through next year as well”.
Oliver Jones, head of allocation at Rathbones, concurred. He expects interest rate cuts once a quarter for the remainder of the year and into 2026.
What are the practical implications of rate cuts on people’s savings?
For savers, Rachel Springall, finance expert at Moneyfactscompare, said the news was a “double-edged sword”, causing “misery” among savers but lowering mortgage costs.
“The continuation of falling mortgage rates will instil a sense of confidence among borrowers,” she noted, with lenders “relaxing stress tests to further support mortgage customers”.
However, savings rates are getting worse and base rate reductions could “spell further misery for savers”, who have watched as the average savings rate has dropped 0.42% year-on-year and is expected to move further following the latest decision.
“It is essential that savers do not wait around for too long to snap up the top rates on the market, particularly if they use their pots to supplement their monthly income,” she concluded.