Bank of England Base Rate Update: February 2025
The Bank of England has announced a reduction in the base rate by 0.25 percentage points, bringing it down to 4.5%. This decision was made by the Monetary Policy Committee (MPC) to help manage inflation and support economic growth.
But what does this mean for you, your mortgage, and your financial plans? Let’s break it down in simple terms.
What Has Changed?
- New Base Rate: 4.5%
- Previous Rate: 4.75%
- Change: A 0.25% decrease
- MPC Vote: 7 members voted for a 0.25% cut, while 2 preferred a larger 0.5% cut
This is the first rate cut in a while, and it signals a gradual shift in policy as inflationary pressures ease.
Why Has the Bank of England Lowered the Rate?
The Bank of England adjusts the base rate to control inflation and support economic stability.
Here are the main reasons behind this decision:
Inflation is Stabilising
- Inflation fell to 2.5% in late 2024, moving closer to the Bank’s 2% target.
- However, short-term forecasts suggest a temporary rise to 3.7% later in 2025 due to energy costs and regulated price changes.
- The Bank expects inflation to return to 2% in the longer term.
Economic Growth Has Been Slower Than Expected
- GDP growth has been weaker than forecasted in late 2024.
- Consumer and business confidence has declined, leading to lower spending and investment.
- The labour market has loosened, meaning there are fewer job shortages, reducing wage-driven inflation.
A Gradual Approach to Monetary Policy
- The MPC is taking a cautious approach, making small adjustments to avoid economic shocks.
- The aim is to balance inflation control with economic stability, ensuring that borrowing costs remain manageable without causing rapid inflation.
How Will This Affect You?
Mortgage Holders
- If you have a tracker mortgage, your rate will likely decrease, reducing your monthly payments.
- Those on standard variable rate (SVR) mortgages may also see a small reduction, but this depends on the lender.
- Fixed-rate mortgage holders won’t see an immediate impact, but rates on new mortgage deals could start to improve.
First-Time Buyers and Home Movers
- Lower rates could make borrowing cheaper, improving affordability.
- Lenders may adjust mortgage offers, so it’s worth checking what deals are available.
- If you’re considering buying a home, now could be a good time to speak to a mortgage adviser.
Savers
- Savings rates may drop slightly, as banks pass on lower interest rates.
- If you rely on savings interest, consider fixed-rate savings accounts to lock in a better return.
Businesses
- Lower borrowing costs could help businesses invest, boosting growth and job creation.
- However, economic uncertainty still means businesses should plan carefully.
What’s Next for Interest Rates?
The Bank of England has signalled that it will take a gradual and careful approach to future rate changes. While some expect more cuts later in 2025, the Bank will monitor inflation and economic growth before making further decisions.
Potential Future Scenarios
- If inflation remains under control, we could see further rate reductions.
- If inflation rises above expectations, the Bank may pause rate cuts to prevent further price increases.
- Global factors, such as energy prices and economic events abroad, could also influence future decisions.
Conclusion
The 0.25% reduction in the base rate is a positive step for mortgage holders and borrowers, but it’s important to stay informed about further changes.
If you’re looking to remortgage, buy a home, or simply understand how these changes affect you, speaking to a mortgage adviser can help you make the right financial decisions.
At Kerr & Watson, we specialise in helping clients navigate the mortgage market. Whether you’re looking for a new deal or want to plan ahead, get in touch for expert advice tailored to your situation.
Read more: Bank Rate reduced to 4.5% – February 2025
