Bank of England cuts interest rates to 4.5%: full updates and analysis

The Bank of England voted to reduce the base rate by 25 basis points at the first MPC meeting of the year on 6 February. Full coverage as it happened from the team at MoneyWeek.

Summary

  • The Bank of England cut interest rates at the first Monetary Policy Committee (MPC) meeting of the year, bringing the base rate from 4.75% to 4.5%.
  • All nine members of the MPC voted to cut the base rate. Seven members voted to cut by 25 basis points, while two members voted for a larger cut of 50 basis points.
  • The move was widely expected. Economists polled by Reuters unanimously said they expected the base rate to fall by 25 basis points.
  • It came after December’s inflation reading (published in January) was lower than expected.
  • The annual inflation rate slowed from 2.6% to 2.5%, surprising analysts who had expected the headline figure to hold steady or inch up slightly to 2.7%.

| When will interest rates fall further | MPC meeting dates | What is inflation? |

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It's almost interest rates day

Good Wednesday morning, and welcome to MoneyWeek’s live blog. The sun is shining in London today, but will interest rates thaw tomorrow?

All eyes have been on US president Donald Trump’s tariffs so far this week, which begs the question: will events across the pond influence the MPC’s thinking?

While events in the US could well appear in the MPC’s meeting minutes, experts are fairly confident that the Bank of England will vote to reduce the base rate by 25 basis points. This would bring it from 4.75% to 4.5%.

Bank of England buildings

(Image credit: Photo by Mike Kemp/In Pictures via Getty Images)

MPC voting split: an overwhelming majority?

Similarly, Taylor (who joined the MPC in September) has warned that a weakening economy calls for a “more accelerated pace of rate cuts”.

It seems reasonable to assume that these three will stick to their previous voting pattern this time around. Some additional committee members will probably come on board too, given December’s surprise inflation drop and the slowdown in UK growth.

“Fears of stagflation will override any immediate desire to drive down inflation, meaning we are likely to see a cut of 25bps this Thursday, lowering the base rate to 4.5%,” said Steve Matthews, investment director at financial services company Canada Life.

Can we expect quarterly rate cuts in 2025?

Markets turned bearish in the wake of the Autumn Budget, when chancellor Rachel Reeves announced a hike to employers’ National Insurance contributions. The fear is that this policy (which will come into effect in April) could keep inflation higher for longer by increasing costs for businesses.

Donald Trump’s return to the White House hasn’t helped. The tariffs he has threatened to impose – and has already started imposing in the case of China – could add to inflationary pressure.

The economists at ING are forecasting something similar – and they recently argued that markets are “slowly but surely” starting to come around to their way of thinking. “Markets are now pricing 78bp of easing by year-end, up from just 29bp in mid-January,” they wrote on Friday.

Slowly does it: BoE likely to maintain a cautious tone

Although experts are fairly confident that rates will fall tomorrow, the Bank of England is likely to maintain a cautious tone during its press conference and in summary documents. For a while now, the party line has focused on a “gradual approach” to rate cuts, with the MPC assessing things on a meeting-by-meeting basis.

The following paragraph has appeared in several summary reports: “Monetary policy will need to continue to remain restrictive for sufficiently long until the risks to inflation returning sustainably to the 2% target in the medium term have dissipated further. The Committee will decide the appropriate degree of monetary policy restrictiveness at each meeting.”

Quick recap: when did the base rate peak?

The base rate peaked at 5.25% – a 16-year high – in August 2023. It was held at this level for almost a year. The Bank of England finally began cutting rates in August 2024 after inflation showed significant signs of coming under control. This cycle has seen two cuts so far, one in August and another in November.

Interest rates are still high compared to their recent history. In the aftermath of the Global Financial Crisis, we lived through a period of ultra-low rates. Experts warn we are unlikely to return to this sort of environment – at least not any time soon.

Chart showing the Bank of England base rate over time

(Image credit: Data sourced from Bank of England)

What would a base rate cut mean for your personal finances?

Let’s turn our attention to what a base rate cut could mean for the pound in your pocket. How will mortgage rates, savings rates and annuities be impacted? Stick with us as we run through the implications for each in our next few posts.

What would a lower base rate mean for your mortgage?

Despite this, Myron Jobson, senior personal finance analyst at Interactive Investor, says that while “fixed-rate mortgage holders won’t see an immediate impact, if expectations of lower rates persist, we could see better deals emerge for new borrowers and those looking to remortgage.”

Commenting on whether prospective homebuyers should choose a fixed or variable-rate mortgage, Jobson added: “With the BoE cutting the base rate and another reduction potentially on the horizon, homebuyers face a tricky decision between fixed and variable mortgages. A variable rate could mean savings if rates fall further, but it’s a gamble.

“A fixed-rate deal, meanwhile, offers certainty in an uncertain climate. The choice ultimately boils down to risk appetite – those comfortable with fluctuations may benefit from a variable rate, while risk-averse buyers might prefer to lock in a deal for peace of mind.”

Cityscape of tightly-arranged houses, Whitby, Yorkshire

(Image credit: Edwin Remsberg via Getty Images)

Mortgage rates: avoid the standard variable rate

While a tracker rate might appeal to some borrowers, avoid falling onto your lender’s standard variable rate. You will automatically be put onto this once you come to the end of a fixed deal, if you don’t refinance in time.

  • Two-year fixed-rate mortgage: 5.51%
  • Five-year fixed-rate mortgage: 5.31%
  • Two-year tracker rate: 5.46%
  • Standard variable rate: 7.78%

Savings rates usually tumble in tandem with the base rate

Generally speaking, lenders are far quicker to cut rates than to boost them – so while savings rates took some time to start rising a few years ago, they will be quick to fall now that the BoE is in a rate-cutting cycle.

Rates have already fallen considerably from their peak, and savers should expect them to fall further if the MPC cuts the base rate tomorrow. With this in mind, now could be a good time to lock in a fixed-rate deal if you don’t need immediate access to a portion of your savings.

  • Easy-access: Chase 5% saver (note that this includes a temporary six-month bonus, plus the underlying rate is linked to the BoE base rate, meaning it will quickly drop if the MPC cuts rates tomorrow)
  • One-year fixed: Charter Savings Bank 4.75% saver (available via Hargreaves Lansdown)
  • Two-year fixed: Hampshire Trust Bank 4.41% saver

Piggy banks falling off a cliff

(Image credit: PM Images via Getty Images)

Are annuities an attractive option for retirees?

Helen Morrissey, head of retirement analysis at investment platform Hargreaves Lansdown, said: “Interest rates are one factor affecting annuity incomes, but with gilt yields remaining robust, any interest rate cut should only have a relatively limited effect.

“Annuities are offering great value right now with the latest data from HL’s annuity search engine showing that a 65-year-old with a £100,000 pension can get up to £7,492 per year from a single-life level annuity with a five-year guarantee. This is just a whisper below the highs experienced in the aftermath of the mini-Budget.

“With any further interest rate cuts expected to happen only gradually, we can expect incomes to remain robust and interest to stay high among retirees looking to secure a guaranteed income.”

Longer term, Trump’s tariffs could actually speed rate cuts up

Tariffs have been a major talking point this week, trumping interest rate speculation as the main story and dominating the financial headlines. But they are unlikely to influence the BoE’s decision tomorrow – and longer term it is still unclear whether they will exert upward or downward pressure on rates.

Paul Dales, chief UK economist at consultancy Capital Economics, told MoneyWeek: “Concerns about tariffs aren’t the main driving force behind what we think will be a decision by the Bank of England to cut interest rates from 4.75% to 4.5% on Thursday. And it’s not clear whether tariffs would make the Bank more inclined to cut rates faster and further later this year or slower and not as far.

“That’s because tariffs could weigh on UK economic growth as well as boost UK inflation. My hunch, though, is that the Bank would be more concerned by the dampening influence on activity. As a result, tariffs would support our existing forecast that the Bank will eventually cut interest rates to 3.5% by early next year.”

US president Donald Trump

(Image credit: Photo by JIM WATSON/AFP via Getty Images)

What do falling interest rates mean for investors?

In reality, it isn’t quite that straightforward though. Central banks also cut rates when growth becomes a concern – and the UK economy has started to stagnate in recent months. The latest UK GDP report showed zero growth in the three months to November (versus the three months before).

There are also concerns about upcoming tax changes this April, when employers’ National Insurance contributions will go up. More analysis on the NI changes to follow.

NI changes: a headwind for UK equity investors?

As we have established, a falling interest rate environment can be good news for equity investors. But if you are looking at the outlook for UK stocks, there are other factors to consider too. This includes the upcoming changes to employers’ National Insurance contributions.

Jason Hollands, managing director at investment platform Bestinvest, recently told MoneyWeek: “The decision to raise National Insurance costs, alongside hiking the minimum wage and incoming workers’ rights legislation, places a significant cost burden on businesses.

“This is a disincentive to hire (and a reason to cut staff), and an incentive to pass those costs on to consumers. All of this takes more money out of the real economy through rising unemployment and inflation, as well as creating a headwind for earnings.”

UK funds are still seeing significant outflows, despite an improving rates environment

Data from funds network Calastone, published this week, shows that UK-focused funds shed £1.07 billion in January, the sixth-worth month on record. It is perhaps surprising in a month where the FTSE 100 hit a new high, but UK equities have been unloved for some time now. Negative sentiment in the aftermath of the Budget hasn’t helped, although the initial catalyst came several years ago in the form of Brexit.

“The UK market contains global businesses that – on a level playing field, after adjusting for sector and quality and growth characteristics – appear significantly undervalued relative to international peers,” writes Oliver Jones, head of asset allocation at the firm.

What’s next for inflation?

In October, the Office for Budget Responsibility (OBR) published a report on the economic and fiscal outlook for the next five years in response to changes in economic policy made by Rachel Reeves’s first Budget.

It is worth noting that there is still room for error in these figures as external shocks to the market cannot be fully anticipated – nor can changes in government policy. The OBR will produce a similar report in March alongside the chancellor’s spring statement.

Energy prices could add to inflationary pressure

The price of gas and electricity has a strong impact on inflation – and not just because of household bills. As energy is used in all parts of the supply chain, higher energy costs can push up the price of goods and services too.

Commenting on the likely outcome of the February meeting, Hetal Mehta, head of economic research at St James’s Place, said: “At the December meeting, the BoE made a dovish pivot that signalled a willingness to support growth despite the inflation risks. It would come as a major surprise to economists and markets alike if the BoE did not vote to cut rates.”

That concludes our interest rates coverage for today. We will be back tomorrow, ahead of the Bank of England's decision at midday. Thank you for joining us.

Good Thursday morning, and welcome back to our interest rates blog. This is Katie Williams and Daniel Hilton reporting live. There's less than two and a half hours to go until the Bank of England announces its next interest rates decision – and a cut is looking very likely. We will be sharing analysis in the lead-up and aftermath. Stick with us.

Bank of England buildings in sunshine

(Image credit: Photo by: Alex Segre/UCG/Universal Images Group via Getty Images)

FTSE 100 hits another record high

The sun is shining and it is a positive start for markets today, with confidence about a rate cut buoying investor optimism. Tariff-related volatility has also quietened down – at least for now. It has been enough to push the FTSE 100 to another record high this morning.

Matt Britzman, senior equity analyst at Hargreaves Lansdown, says a dying-down of the volatility has allowed investors to “zero in on a wave of big earnings reports,” as well as hopes of a rate cut.

“This positive vibe is spreading across Europe, giving global markets a much-needed boost,” he adds. “Seems like investors may be ready to dance to the tune of good news again.”

An economist’s bogeyman: what is stagflation?

Labour's “number one mission” to boost growth

Since winning the election, Labour has been at pains to paint itself as the “party of growth”. Stimulating the economy and putting more money into the pockets of both individuals and businesses is one way to avoid stagnation, but will the government be successful?

However, critics have countered that these projects will do little to undo the damage of a tax-raising Budget – in particular the decision to raise employers' National Insurance contributions.

Chancellor Rachel Reeves delivers growth speech at the Siemens Healthineers factory near Oxford on Wednesday, 29 January 2025

(Image credit: Photographer: Chris Ratcliffe/Bloomberg via Getty Images)

Fixed mortgage rates have risen, despite base rate cuts

Commenting on the findings, Rachel Springall, finance expert at Moneyfacts, said: “Borrowers will be disappointed to see a rise to fixed mortgage rates over the past month, with the average five-year fixed rate hitting a six-month high.”

“The Bank of England base rate dropped by 0.25% in November 2024 to 4.75%, so it would not be surprising to see borrowers frustrated that fixed mortgage rates are going up”, she continued.

Pound weakens against the dollar in anticipation of rate cut

Commenting on what the latest moves mean for UK companies, Russ Mould, investment director at AJ Bell, said: “A weaker pound against the US dollar benefits companies which earn some or all of their money in the American currency, hence why we saw miners, gambling group Entain, construction rental firm Ashtead and ratcatcher Rentokil get a boost.”

UK currency

(Image credit: Photo Illustration by David Tramontan/SOPA Images/LightRocket via Getty Images)

What's happening in the savings market?

Capital Economics: Inflation could rise to 3% this year

BREAKING: BoE cuts interest rates

MPC voted decisively in favour of the cut

MPC: "Substantial progress on disinflation"

Reeves welcomes rate cut but "dissatisfied" with growth

Responding to the latest news, chancellor Rachel Reeves said: “This interest rate cut is welcome news, helping ease the cost-of-living pressures felt by families across the country and making it easier for businesses to borrow to grow.

“However, I am still not satisfied with the growth rate. Our promise in our Plan for Change is to go further and faster to kickstart economic growth to put more money in working people’s pockets. That’s why we are taking on the blockers to get Britain building again, ripping up unnecessary regulatory barriers and investing in our country to rebuild roads, rail and vital infrastructure.”

MPC will be monitoring tariffs "closely"

Markets pricing in two or three more rate cuts this year

Which MPC members voted for a larger rate cut?

Two members of the MPC wanted to go further today, voting to reduce rates to 4.25% rather than 4.5% – Swati Dhingra and Catherine Mann.

Reeves's plan for growth

Bailey: Economy is not in a state of stagflation

The central bank’s governor, Andrew Bailey, has said that he will not use the term ‘stagflation’ to refer to Britain’s economy. He explained that indicators show a trend of disinflation, although he conceded that economic growth has been flat.

GDP growth will remain weak until 2027, says BoE governor

Bailey: Path of disinflation remains in place

Governor of the Bank of England, Andrew Bailey

(Image credit: Photo by Kin Cheung - WPA Pool/Getty Images)

Downgrade to growth forecast is "not a judgement on the Budget"

Having covered the latest interest rates news, let's turn our attention back to your personal finances. What does today's decision mean for you?

Consumers should remain cautious

Emergency savings

(Image credit: J Studios via Getty Images)

Rate cut was already baked into the savings market

She explains: "This rate cut was all but nailed on. The savings market hadn’t just counted its chickens, it had roasted and sold them, pricing the rate cut firmly into fixed-rate deals [in advance]. It means the fixed-term market is unlikely to move far for now."

Rate cut could offer a welcome boost to the housing market

The decision to cut interest rates by 25 basis points is a “welcome shot in the arm for the UK housing market and the country’s stagnating economy”, according to specialist property lender Together.

What a rate cut means for pensioners

This means you can take your time when weighing up whether an annuity is the right strategy for you. This is generally a good idea, as buying an annuity is an irreversible decision. Data from Hargreaves Lansdown today shows that a 65-year-old with a £100,000 pension can get up to £7,492 per year from a single-life level annuity with a five-year guarantee.

Currency tailwinds could send the FTSE 100 higher

Explaining the difference between the US and the UK outlook, Garry White, chief investment commentator at Charles Stanley, says: "Fewer interest rate cuts are expected across the Atlantic in 2025, as many of Donald Trump’s policies appear to be inflationary.

City of London

(Image credit: Karl Hendon via Getty Images)

Other things to look out for this month

  • Next GDP report (covering December and the fourth quarter of 2024): 13 February
  • Next labour market report: 18 February
  • Next inflation report (covering January): 19 February

That concludes our live coverage on interest rates. Thank you for joining us today! There are still seven meetings to go this year, which we will be covering in detail over the months to come. Check out our calendar of upcoming MPC meeting dates.