The Bank of England has lowered its base interest rate from 4.75% to 4.5%, marking its lowest level since June 2023. While the decision is expected to provide relief for some borrowers, the overall impact on mortgages, savings, and economic growth remains mixed. The central bank also halved its growth forecast for 2025, citing ongoing economic uncertainty.
How the Rate Cut Affects Mortgages
For homeowners, the effect of the interest rate reduction depends largely on the type of mortgage they hold.
- Tracker mortgages: Those on tracker mortgages, which move in direct relation to the Bank of England’s base rate, will see an immediate reduction in borrowing costs.
- Standard variable rate (SVR) mortgages: Lenders have discretion over SVR adjustments. Some, such as Santander, have already announced reductions, with its SVR set to drop to 6.75%.
- Fixed-rate mortgages: Borrowers on fixed-rate deals will see no immediate change in repayments. However, as lenders adjust their rates to reflect market expectations, future fixed-rate mortgage deals may become more competitive.
The mortgage market had already anticipated multiple rate cuts throughout 2025, leading some lenders to reduce rates ahead of this decision. The Yorkshire Building Society, for example, recently cut its fixed mortgage rates by up to 0.31 percentage points.
- 629,000 homeowners on tracker mortgages will see an average reduction of £29 in their monthly repayments.
- Nearly 700,000 people on standard variable rate (SVR) mortgages will have to wait to see if their lender passes on the rate cut.
While tracker mortgage holders will see immediate reductions in repayments, those on standard variable rates must wait for lender decisions. Fixed-rate mortgage rates may adjust over time, depending on market conditions and future rate changes.
Implications for Savings Accounts
For savers, the rate cut is expected to lead to lower returns on easy-access accounts and non-fixed savings products.
- Instant-access savings: These accounts are not explicitly tied to the base rate but often follow its movement. Savers may see a gradual reduction in rates.
- Fixed-rate savings accounts: Interest rates on new fixed-term savings products had already begun to decline, reflecting expectations of future cuts. Currently, a one-year fixed-rate bond offers an average return of 4.2%, which is below the new base rate.
Some banks, particularly newer financial institutions, continue to offer higher returns to attract depositors. Raisin UK, for example, is offering 4.67% on a one-year fixed-rate bond.
The Broader Economic Outlook
Despite the rate reduction, the Bank of England has lowered its UK economic growth forecast for 2025 from 1.5% to 0.75%.
- The decision reflects concerns about persistent inflationary pressures, which are expected to increase later this year due to rising energy and water costs.
- Inflation is now projected to reach 3.7% before gradually declining to the 2% target by the end of 2027.
- The weaker growth forecast raises concerns over economic stability, with some analysts suggesting that future interest rate cuts may be limited.
Governor Andrew Bailey emphasised that while further reductions are likely, the Bank will assess the situation “meeting by meeting” due to global economic uncertainties. The UK government has reiterated its commitment to economic growth, with Prime Minister Sir Keir Starmer stating that the revised forecast strengthens the need for investment in infrastructure and housing.
More Detailed Economic Growth and Inflation Forecasts
- The UK GDP forecast for 2025 has been revised down from 1.5% to 0.75%.
- Growth expectations for 2026 and 2027 have been revised up to 1.5% (from 1.25% previously).
- Inflation is expected to rise to 3.7% later this year and is not projected to return to 2% until the end of 2027.
- The UK economy recorded zero growth in Q3 2024, and growth for Q1 2025 is now projected at just 0.1% (down from 0.3% in earlier forecasts).
Market Reaction and Future Expectations
Following the interest rate cut, the British pound initially declined before stabilising. Analysts are divided on the Bank’s next steps:
- Some predict that additional cuts could come later in the year, particularly if economic growth remains sluggish.
- Others point to inflation risks and argue that further reductions may not be as aggressive as markets had previously anticipated.
Reactions from banks and financial markets
- Santander has confirmed that it will fully pass on the rate cut to variable-rate mortgage customers from 3 March 2025.
- The British pound initially fell following the rate announcement but later stabilised.
External Factors Influencing Monetary Policy
Beyond domestic monetary policy, several global and policy-related factors could influence the economic outlook:
- Higher energy and water costs are expected to push inflation up later this year.
- Potential trade tariffs in the US could contribute to inflationary pressures in the UK.
- The increase in National Insurance contributions for employers, introduced in the last Budget, has raised concerns among businesses about investment and job creation.
For borrowers and savers, the key takeaway is that while some relief is coming, economic uncertainty remains high, making financial planning increasingly important in the months ahead.
