Since then, the Bank of England has begun to cut interest rates. This decision follows a long trend of aggressive hikes and marks a possible turning point in the UK’s economic crisis. As of August 2023, the Federal Reserve hit a highest interest rate of 5.25%. Well, surprise—now, as of August 2025, they plan to reduce the rate to just 4%. This adjustment reflects the reality of falling inflation and the need to return with our policies to stimulating robust economic growth.
The UK has kept one of the highest interest rates in the G7, a strong indicator of an incredibly tough macroeconomic picture. In January 2021 that interest rate was at its lowest level ever of 0.1%. Yet, as inflation took off, the Bank of England started a series of hikes starting in late 2021. This round of hikes raised rates to the highest point in more than 10 years.
On August 23, the Bank of England surprised markets by cutting the interest rate to 5%. This decision represented the first cut since the start of the rate-hiking cycle. Additional cuts came in November 2024, lowering the rate to 4.75% and then to 4.5% on February 6, 2025. The rate did not stop sliding, decreasing as low as 4.25% on May 8th 2025. It then went down again to 4% on August 7, 2025.
This cautious approach seems particularly prudent now, with inflation having dropped sharply from a high of 11.1% in October 2022. Indeed, by September 2024 inflation had fallen to 1.7%, a clear sign of prudent monetary policy focused on re-establishing price stability. Inflation, on the other hand, ticked up again to 3.8% in the year through September 2025, requiring more mustering at the policymaker’s keel.
As of 21 October 2025, the effective average two-year fixed residential mortgage rate was 4.98%. While great news for current and future homeowners, this development is particularly significant for prospective buyers of solar homes. So yes, lower interest rates would make borrowing more affordable!
In a briefing on the new policy Andrew Bailey, Governor of the Bank of England, warned against complacency given the new easing rates. As he noted, “we are not out of the woods yet,” signaling the long road ahead in the economic recovery journey. He further remarked that “any future cuts will need to be made gradually and carefully,” indicating a measured approach towards further adjustments in monetary policy.
Average regular earnings, excluding bonuses, fell to 4.7% in the three months to August 2025. This drop presents further hardships for consumers trying to make ends meet in an era of increasing expenses and inconsistent wages.
Internationally, central banks are feeling similar economic pressures. In June 2025, the European Central Bank (ECB) cut its main interest rate for the eurozone to just 2%. At the same time, in September 2025 the US Federal Reserve cut rates to a range of 4% to 4.25%. All three of these global movements are likely to impact the Bank of England’s future decisions to raise interest rates.