Bank of England cuts interest rates to 4.25%

The Bank of England has lowered interest rates by 25 basis points to 4.25%, marking its fourth cut since August 2023 and the clearest signal yet that policymakers are responding to a changing global and domestic economic environment.

The Monetary Policy Committee (MPC) split three ways: five members backed the 0.25% cut, two pushed for a more aggressive reduction to 4%, and two opted to hold.

The move brings rates to their lowest level in nearly two years, following a steady descent from a post-Covid peak of 5.25%.

Governor Andrew Bailey cited easing inflation pressures as the basis for the decision, but warned: “Recent weeks have shown how unpredictable the global economy can be.”

His comments come as President Trump’s sweeping tariff regime continues to roil global markets and cloud the outlook for UK exporters.

Divided committee, united uncertainty

The Bank’s latest forecasts indicate that inflation, currently at 2.6%, is likely to rise temporarily to 3.5% this year, driven by recent hikes to household bills including energy and water. But officials maintain that the spike will be short-lived, pointing to softening wage growth, falling services inflation, and global disinflationary trends.

The committee noted that while US tariffs had “intensified” uncertainty, their direct impact on the UK may slow price rises rather than accelerate them. The logic? Global supply chains are adapting. Countries like China are rerouting exports away from the US, creating downward pressure on prices in Europe.

“Today’s rate cut was expected but nonetheless will be welcomed by businesses. The announcement of the rise in national insurance contributions for employers and other policy changes had a significant negative impact on business confidence, and the deterioration of the global economic backdrop amid trade tensions creates significant downside risks for the UK economy. Overall, today’s cut will ease borrowing costs for the private sector and should support the housing market. Further monetary easing is likely on its way over coming quarters.”

Markets, meanwhile, are leaning further into the dovish shift. Forward pricing now implies up to four more cuts before year-end, a scenario that would bring Bank Rate close to 3.25%—a full percentage point below current levels.

Impact for borrowers, businesses and government

Roughly 600,000 UK homeowners on tracker mortgages will see an immediate drop in monthly payments. However, the majority—those on fixed-rate deals—will feel the effects more gradually, especially as they come up for renewal.

The rate cut will also ease borrowing costs for businesses, many of whom are contending with higher employer National Insurance rates and fragile consumer confidence. Early Q1 growth data is expected to show a 0.6% expansion, slightly better than expected, offering a glimmer of hope for Chancellor Rachel Reeves and the Starmer government as they seek to frame economic recovery as a centrepiece of policy.

The IMF has projected the UK will grow by 0.75% in 2025, down from earlier expectations of 1.5%. But that forecast could improve if lower interest rates stimulate investment and temper the drag from external headwinds.

The Bank is walking a tightrope: cut too slowly, and risk choking off growth; cut too fast, and inflation may reignite. For now, the decision to cut—amid a divided committee—suggests a central bank in transition, adapting to both an evolving global trade order and a domestic economy still nursing the aftershocks of inflationary volatility.

With Prime Minister Keir Starmer expected to provide an update on UK-US trade talks later today, the question now is whether fiscal diplomacy can match monetary action—and whether both can restore confidence in the UK’s medium-term economic path.