UK interest rates cut to 4.25% by Bank of England
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The Bank of England reduces interest rates to 4.25%, marking the fourth cut in a year as inflation slows and global trade tensions impact the economy.
The Bank of England has reduced interest rates to 4.25%, marking the fourth cut in the past year. This reduction follows a slowdown in inflation and reflects the unpredictable nature of the global economy, according to bank governor Andrew Bailey. However, he also noted the ongoing unpredictability of global trade, citing the US’s introduction of significant tariffs.
The Bank initially considered a larger cut, potentially bringing rates down to 4%, as it weighed the impact of global trade tensions, including a trade war, and the falling energy prices that had influenced inflation. A tariff deal between the UK and the US is set to be announced soon, which may help reduce uncertainty and ease some of the pressures caused by tariffs. Currently, most UK goods imported to the US face a 10% tariff, with steel and cars subject to even higher duties.
In a press conference after the rate decision, Bailey expressed optimism about the UK leading the way with the expected tariff deal with the US, which is anticipated to provide a boost to the UK economy. He cautioned that future rate cuts would be “gradual and careful,” noting the split opinion among policymakers. Out of the nine members on the Bank’s rate-setting committee, five voted for the 4.25% cut, while two favored a further reduction to 4%, and two members opted for no change.
In terms of the impact of US tariffs, the Bank acknowledged that the ongoing trade war would slow UK economic growth and lead to lower inflation than originally expected. This inflation drop will be supported by lower oil and gas prices, which are expected to benefit UK households. The importation of cheaper goods from Asia to Europe, including the UK, is also anticipated to ease inflationary pressures.
UK inflation for March stood at 2.6%, but it is expected to rise temporarily to 3.5% this year due to the increase in household bills, such as energy and water costs, which took effect in April. The Bank expects inflation to ease once these price rises subside, with lower oil and gas prices expected to have a significant impact in the months ahead.
Employers also saw a rise in National Insurance last month, but the Bank noted that the impact on businesses appeared to be relatively small, despite a hit to business confidence. Chancellor Rachel Reeves welcomed the rate cut but stressed the continued cost-of-living pressures faced by families. She acknowledged that there was still more work to be done to support the economy and households.
The Bank of England uses interest rates as its main tool for controlling inflation, aiming to keep it near its target of 2%. The base interest rate set by the Bank directly influences borrowing costs, including mortgage rates. With the higher interest rates in recent years, borrowers have faced increased costs for mortgages and credit cards, though savers have seen better returns.
The latest rate cut is expected to help some homeowners, particularly those with tracker mortgages, as it could lower their monthly repayments. For a typical tracker mortgage-holder, this cut could reduce monthly repayments by about £29. Vanda, a homeowner with a tracker mortgage, expressed relief, saying that the drop would help, especially after her recent redundancy.
While more than 80% of customers have fixed-rate mortgages, they may still face higher costs when their deals expire and they renew their mortgages. Recent trends suggest mortgage rates are starting to edge down as markets anticipate further rate cuts later this year.
The theory behind raising interest rates to tackle inflation is that making borrowing more expensive will reduce spending, leading to a drop in demand for goods and a reduction in price rises. However, high rates can also harm the economy, as businesses may delay investment and hiring, which could further slow economic growth.
Despite this, the Bank’s forecast for UK growth in the first quarter of the year has been revised upwards to 0.6%, above earlier expectations. Official figures for UK growth will be released next week, and this boost could be a welcome development for the government, which has focused on growing the economy to improve living standards.
Earlier in the year, the Bank of England had reduced its growth forecast for 2023 to 0.75%, down from an earlier estimate of 1.5%. The recent rate cut and improved growth projections may offer some optimism for the economy moving forward.
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