The Bank of England has lowered its base interest rate to 4.25%, marking the lowest level in nearly two years, as policymakers respond to easing inflation and growing global trade uncertainty.
The quarter-point cut, down from 4.5%, was agreed upon by a divided Monetary Policy Committee (MPC). Five members supported the 0.25% reduction, while two advocated for a steeper cut to 4%, and two others preferred no change at all.
Bank Governor Andrew Bailey cited the slowdown in inflation as a key factor in the decision but cautioned that “recent weeks have shown how unpredictable the global economy can be,” referencing the impact of new U.S. tariffs introduced under President Donald Trump’s administration.
The move comes as the UK prepares to announce a trade agreement with the U.S., where many British exports currently face a 10% tariff, with even higher duties on steel and vehicles. The Bank noted that regardless of whether a deal is finalized, the overall impact of the tariffs on UK inflation and growth is likely to remain limited.
Inflation rose to 2.6% in March, and the Bank forecasts a temporary increase to 3.5% later this year, driven by recent hikes in household bills including energy and water. However, falling oil and gas prices are expected to bring inflation down again in the coming months.
Despite a rise in National Insurance contributions last month, the Bank said the effect on businesses has so far been minimal. Nonetheless, it acknowledged a recent dip in business confidence.
Bailey emphasized that the Bank would adopt a cautious approach to further cuts, stating, “Ensuring low and stable inflation remains our priority. We must stick to a gradual and careful path forward.”
This is the second rate cut this year and the fourth since rates peaked at 5.25% in 2023. Interest rates play a crucial role in managing inflation by influencing borrowing and saving behaviour. High rates typically slow economic activity but can also restrain business investment and consumer spending.
The Bank’s base rate directly affects borrowing costs for millions of consumers. Around 600,000 mortgage holders with tracker loans will see an immediate reduction in repayments, while those on fixed-rate deals could benefit when refinancing, as lenders anticipate further cuts.
Looking ahead, the Bank expects the UK economy to grow by 0.6% in the first quarter — a stronger-than-expected figure. Official GDP data is due next week. The International Monetary Fund has also predicted that the Bank may implement two more rate cuts before the year ends, providing further relief to borrowers and potentially boosting economic momentum.
