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  • Wednesday, 27 August 2025

UK interest rates cut to 4% in tight decision

UK interest rates

The Bank of England has narrowly voted to cut interest rates, a knife-edge decision that required a second ballot.

The base rate has been reduced by a quarter of a percentage point, from 4.25% to 4%, marking the fifth cut since last August. However, the historic second vote taken by policymakers suggests that decisions on future rate cuts will be more finely balanced amid fears that inflation could rise again.

The rate reduction may lead to lower monthly payments for some homeowners, but it will mean poorer returns for savers.

According to the Bank's Monetary Policy Report, inflation is forecast to hit 4% in September. That is double the Bank's target and higher than the 3.8% rate predicted in its May report. Andrew Bailey, the Governor of the Bank of England, said the decision was ‘finely balanced’.

‘Interest rates are still on a downward trend,’ he said, adding that any future cuts ‘must be gradual and carefully considered.’

Businesses informed the Bank that significant increases in National Insurance Contributions and the national living wage since April have added up to 2% to food prices. The Bank also noted that adverse weather conditions globally had raised the cost of commodities such as beef, coffee, and cocoa. However, businesses told the Bank that labour costs ‘will continue to drive up food prices in the second half of the year,’ and that new packaging legislation will also come into force.

To manage these rising costs, some businesses said they were considering letting employees go. They also reported that customers were ‘trading down’ by purchasing own-brand products instead of branded ones, opting for cheaper cuts of meat, and buying food staples in larger value packs.

At 4%, interest rates are now at their lowest level since March 2023. This will benefit borrowers, particularly the 600,000 people with tracker mortgages, who will see an immediate drop in their monthly repayments. According to the financial services firm Moneyfacts, the latest cut means that repayments on an average variable-rate mortgage of £250,000 over 25 years will fall by about £40 per month.


 

‘We are still a little bit anxious about the future’

 

However, many homeowners are having to remortgage this year at much higher rates. Adam Christie recently renewed his mortgage, switching from a five-year fixed term at 1.8% to a new two-year term with a rate of 3.33%.

‘It was a major jump, but not as much as we were worried about,’ he told the BBC. Mr Christie had been budgeting for a £200-per-month increase, but his repayments have gone up by around £100. While he calls this ‘the best of a bad situation,’ he admits to feeling uncertain.

‘We're still a little worried about the future and what it could hold. They might go up again. But I suppose only time will tell,’ he said.

Chancellor Rachel Reeves said the rate cut was ‘welcome news’ that would ‘help bring down the cost of mortgages and loans for families and businesses.’

However, Shadow Chancellor Mel Stride argued that interest rates ‘should be falling faster now,’ adding: ‘Rates are only starting to fall now to help the poor economy that Rachel Reeves has created.’

Daisy Cooper, the Liberal Democrat Treasury spokesperson, said the cut ‘would have happened months earlier if the government wasn't being a roadblock to growth.’

The Bank's Monetary Policy Committee was split on the decision. Four members voted for the cut, four voted to hold rates, and one, Alan Taylor, voted for a steeper cut. The Bank is now forecasting that GDP figures for the April-to-June quarter, due next week, will show a dramatic slowdown to just 0.1% growth. It added, however, that the government's trade agreement with the United States should help boost exports and the wider economy later this year.

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