Bank of England cuts interest rate to 4%
The Bank of England’s Monetary Policy Committee (MPC) has voted by a narrow majority to reduce the Bank Rate by 0.25 percentage points, bringing it down to 4% from 4.25%.
The cut marks the fifth reduction in interest rates since August 2024 and lowers borrowing costs to their lowest level in more than two years.
Despite this easing, inflation remains above target.
Consumer Prices Index (CPI) inflation increased to 3.5% in the second quarter of 2025, influenced by rises in energy, food, and administered prices. Pay growth, while still elevated, has slowed and is expected to decline further. Services inflation has been broadly flat in recent months.
The Committee forecasts inflation will peak at around 4.0% in September before gradually returning to the 2% target.
However, there is concern that temporary price rises, particularly in food and energy, could influence wage and price-setting behaviours, potentially leading to persistent inflationary pressure.
Economic growth has remained subdued, with signs of a gradually loosening labour market and some emerging spare capacity. The Committee noted downside risks to economic activity, including domestic and geopolitical uncertainties, although trade policy uncertainty has eased somewhat.
The decision to cut the Bank Rate was not unanimous. Five members voted for the 0.25 percentage point reduction, including one member who preferred a larger 0.5 percentage point cut but agreed to the smaller reduction to secure a majority.
Four members voted to keep the rate at 4.25%, expressing concern that inflationary pressures might persist and that a slower loosening of monetary policy was prudent.
Committee members highlighted a balance of risks. On one side, elevated food prices and wage growth may fuel inflation. On the other, weaker consumer demand and increased household savings could ease inflationary pressure.
The MPC emphasised that future monetary policy adjustments will depend on the pace of disinflation and economic data, stating that policy is not on a predetermined path but will remain responsive to new evidence.
The Bank Rate influences borrowing costs for mortgages, loans, and savings, affecting households and businesses across the UK.
Jenny Ross, Editor of Which? Money, said:
“This latest rate cut has been anxiously awaited by mortgage borrowers, with rates finally falling to levels not seen since spring 2023. While this should offer some respite to first time buyers and those coming to the end of fixed rate deals, borrowers will be hoping for further decreases over the next few months.
“If you’re a saver, now is the time to take stock of your accounts. Banks will likely be swift to cut the interest paid on variable rate accounts, so shop around to make sure your money is working as hard for you as it can.”
TUC General Secretary Paul Nowak said:
“This welcome cut will reduce financial pressures on families and businesses. And it will mean that more money gets spent in local communities, instead of boosting the profits of banks.
“This will help to get our economy growing faster. The Bank of England must keep going with further cuts through the rest of this year.”
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