The Bank of England is expected to reduce interest rates today, a move that will be closely watched by households, businesses, and economists. Analysts anticipate a 0.25 percentage point cut, lowering the benchmark rate from 4.75% to 4.5%, as the UK economy continues to struggle with slow growth.
The Bank uses interest rates as its primary tool to manage inflation, which remains above its 2% target. However, an unexpected dip in inflation at the end of last year has increased expectations for a rate cut.
Economic Pressures and Global Uncertainty
Despite the recent decline in inflation, it is expected to rise again in the coming months, partly due to changes introduced in the UK Budget and uncertainty surrounding US President Donald Trump’s potential tariffs. If these import taxes are implemented, they could cause inflationary pressures globally, which may push prices higher in the UK.
Impact on Households and Businesses
A reduction in interest rates will have immediate effects on borrowers and savers:
Mortgage holders on tracker deals (approximately 629,000 households) would see an instant reduction in their monthly repayments, with an expected decrease of around £29 per month.
Variable-rate mortgage holders may also benefit, as lenders will be pressured to adjust their rates accordingly.
Fixed-rate mortgages will not be affected immediately, but new borrowers or those looking to refinance could see better deals in the coming months.
Savers, however, may see lower returns on their deposits, as banks adjust interest rates on savings accounts.
A ‘Gradual’ Approach to Rate Cuts
Bank of England Governor Andrew Bailey previously stated that the Bank would take a cautious approach to lowering rates, warning that future cuts will be data-dependent.
“We can’t commit to when or by how much we will cut rates in the coming year,” Bailey said in December.
The UK economy has shown little to no growth in recent months, with businesses bracing for higher costs from April, including rising National Insurance contributions and an increase in the minimum wage.
Paul Dales, chief UK economist at Capital Economics, commented that the Bank is trying to strike a balance between supporting a stagnant economy and preventing inflation from surging again.
While Trump’s proposed tariffs are unlikely to have an immediate impact on UK interest rates, stronger-than-expected wage growth could influence the Bank’s future decisions.
