In a historic moment, the Bank of England has lowered their interest rate to 4%. This announcement comes after a long line of smaller cuts dating back to late 2024. On August 7, 2025, they announced a new proposal which marks a huge turnaround. This move follows the recent peak rate of 5.25% set in August 2023. The temporary rate reduction will help provide a measure of relief for beleaguered homeowners. It is intended to boost the economy with inflation seeming to cool down.
In January 2021 the Bank of England cut its interest rate to a record low of 0.1%. However, as economic conditions improved in late 2021, the bank began increasing rates to combat rising inflation. The entire path of expected future interest rates was shifted dramatically, eventually leading to a new peak trajectory with the top rate of 5.25% last year. After hitting that maximum, the Bank of England launched a path of cuts. They pulled rates down to 5% in August 2024 and down to 4.75% in November 2024. The cuts didn’t stop there with another cut to 4.5% on February 6, 2025 and further dropping to 4.25% on May 8, 2025.
The latest cut to 4% is expected to have a tangible impact on approximately one million homeowners across the country. Around 500,000 of these homeowners have mortgages which “track” the Bank of England’s base rate. A cut of 0.25 percentage points typically reduces their monthly repayments by an average of £29. This simple change can really relieve the financial burden they are under. Second, more than 500,000 other homeowners on standard variable rates would probably see their monthly payments drop by an average of £14.
James Smith, a developed markets economist at ING Holding said he too was optimistic about the recent inflation drops. He stated, “The latest drop in inflation fits into a broader body of evidence suggesting that price pressures are cooling.” This view would support the Bank’s ongoing strategy of combating inflation while offering relief to high-interest borrowers.
The decision-making body behind these interest rate hikes—called the MPC The Monetary Policy Committee—is made up of nine members. Fourth the vote, in their last meeting in November, four members wanted to adopt an immediate decrease in the rate. On the other hand, five members were in favor of no changes. This close of a division reflects the lack of consensus among policymakers about how best to respond to today’s economic challenges.
Analysts have been rushing to forecast that interest rates will soon be lowered from the historic high of 4% to 3.75%. Homeowners, especially those with adjustable-rate mortgages, are anxiously awaiting news from the MPC. A united front of economists have indicated that should inflation continue to recede, additional cuts may be in order.