The Bank of England is expected to lower interest rates for the first time in months, as it seeks to counteract the UK’s sluggish economic growth. Economists anticipate a 0.25 percentage point reduction, bringing the rate down from 4.75% to 4.5%, a move closely watched by markets, businesses, and mortgage holders.
This decision follows a decline in inflation to 2.5% in December, edging closer to the Bank’s 2% target but still above its preferred level. With economic uncertainty heightened by global trade tensions and domestic budgetary changes, policymakers are weighing the risks of inflation against the need to stimulate growth.
Inflation slowdown triggers rate cut speculation
The Bank of England‘s base rate is its primary instrument for controlling inflation, which measures the rate at which consumer prices rise. A sustained reduction in inflation has bolstered expectations that the Bank may now feel confident enough to ease borrowing costs.
- Inflation fell to 2.5% in December, down from its peak of 11.1% in October 2022.
- The Bank’s official target remains 2%, though economic forecasters warn that upcoming fiscal changes could push it back up.
- High interest rates have curbed consumer spending and investment, slowing economic momentum.
While the cooling of inflation supports a rate reduction, uncertainty remains. The UK economy stagnated in late 2023, with November’s growth figures coming in weaker than expected. Analysts at Capital Economics suggest that easing monetary policy is aimed at “supporting an economy that appears to have ground to a complete halt and preventing inflation from taking off again.”
Impact on mortgages, savings, and businesses
The anticipated rate cut will have immediate effects on mortgage holders, particularly those with tracker and variable-rate loans. An estimated 629,000 mortgage-holders on tracker deals could see their monthly repayments fall by around £29 if the Bank proceeds with the expected reduction.
- Tracker mortgage holders: Payments adjust automatically in line with the base rate.
- Variable-rate mortgage holders: Lenders may lower their rates, though this is not guaranteed.
- Fixed-rate mortgage holders: No immediate change, but future deals may become more competitive.
While homeowners with mortgages stand to benefit, savers could lose out as banks are likely to lower the interest rates offered on savings accounts. For businesses, lower borrowing costs could encourage investment and expansion, though firms remain wary of budget-related cost pressures, such as rising National Insurance contributions and higher minimum wages set for April.
