Interest rates cut to 4.5%

The Bank of England (BoE) has cut interest rates by a quarter of a percentage point to 4.5%.

That's the lowest they've been since June 2023. 

Interest rates had been kept on hold in December, due to weak economic growth in the final quarter of 2024.

But there was some positive news too, as the rate of inflation fell to 2.5% in December, raising hopes that a rate cut could be just around the corner.

More rate cuts in 2025?

The BoE’s monetary policy committee cut interest rates just twice in 2024.

But governor Andrew Bailey has already hinted that further rate cuts could be just around the corner, and many analysts agree.

Morgan Stanley, for example, has predicted that interest rates will be cut five times in 2025 and end the year at 3.50%.

However, the BoE will be weighing up the possibility of more rate cuts against a very complex backdrop, including a UK economy that’s struggling to grow, waning business confidence and a global trade war started by US president Donald Trump.

What are interest rates and how do they affect me?

The BoE interest rate is the rate at which the UK’s central bank lends money to commercial banks. 

Interest rates directly impact borrowing costs for loans, such as mortgages and credit cards, as well as the returns on savings.

They’re also the lever that the BoE can pull if it wants to tackle inflation or encourage spending.

Mortgage rates

When the Bank of England lowers interest rates, mortgage rates usually come down too.

That can push up demand for property and make it cheaper to borrow money to buy a house.

But there’s no guarantee that mortgage rates will fall when the BoE lowers rates, as lenders will also weigh up other factors such as market conditions and risk appetite.

And if you’re on a fixed-rate mortgage, it could be some time before you see any changes.

Credit cards and loans

When interest rates are high, lenders charge more for borrowing. 

So a fall in interest rates can be good news if you’re repaying a loan.

But that’s not the case with credit cards, as they don’t always follow the bank rate closely, and also depend on factors like credit risk and lender policies.

Savings

On the other hand, high interest rates can be a positive for savers. 

If rates go up, you can get better returns on your savings accounts.