Bank of England Cuts Interest Rates to 4.25%: What It Means for You

2025-05-08

Industry News

On 8 May 2025, the Bank of England announced it is cutting interest rates to 4.25%. This is the fourth rate cut since August 2024. The decision comes as the UK faces a slowing economy, rising prices, and uncertainty in global trade.

In this article, we explain why the Bank made this decision, what it means for you, and what could happen next. Whether you have a mortgage, savings, or just want to understand how this affects your money, we break it all down in simple terms.

What Are Interest Rates?

An interest rate is the cost of borrowing money or the reward for saving it. When you borrow from a bank, you usually pay back more than you borrowed. That extra amount is called interest. When you save money in a bank, the bank pays you interest in return.

The Bank of England sets a base interest rate. This affects how much interest banks charge you or pay you. If the Bank of England raises the rate, borrowing becomes more expensive. If it lowers the rate, borrowing gets cheaper.

Why Has the Bank of England Cut Interest Rates?

1. The Economy Is Slowing Down

The UK economy is not growing as fast as before. Many businesses are cutting back. People are spending less because things are more expensive. The Bank of England hopes that lower interest rates will encourage people to borrow and spend more. This can help the economy grow again.

2. Prices Are Going Up (Inflation)

Inflation means prices are rising. In March 2025, inflation was 2.6%. It is expected to go up to 3.5% in the summer. High inflation makes it harder for people to afford everyday items. While cutting interest rates might seem risky during inflation, the Bank believes prices will fall back to their 2% target by 2027.

3. Global Uncertainty

The world economy is facing challenges. The US is making new trade rules under its current leadership. This has caused worries for UK businesses that trade with the US. Lower interest rates can help keep the UK economy stable during this uncertain time.

What This Means for You

This change in interest rates will affect many people in different ways. Let’s look at how it might impact you.

If You Have a Mortgage

Tracker or Variable-Rate Mortgages

If your mortgage rate moves with the Bank of England base rate, your payments will likely go down. This is because banks usually follow the Bank of England’s lead when setting rates.

Fixed-Rate Mortgages

If you have a fixed-rate mortgage, your payments won’t change for now. But if your deal ends soon, you might be able to remortgage at a better rate. However, today’s rates are still higher than they were a few years ago.

If You Are Saving Money

Lower interest rates are not good news for savers. You may earn less money from savings accounts. Banks often reduce savings rates when the Bank of England cuts the base rate.

To make the most of your money, you might consider:

• Fixed-rate savings accounts that still offer better rates.
   
• Moving money to accounts with higher interest.
   
• Speaking to a financial adviser for long-term savings plans.
   

If You Have a Pension or Investments

Lower rates can affect pensions and investment returns:

• Annuities, which provide a fixed income in retirement, may offer lower rates.
   
• Some investments might not grow as fast.
   
• But stock markets sometimes rise when rates are low because businesses can borrow more cheaply.
   

If you’re near retirement or rely on investment income, talk to an expert to review your options.

What Happens Next?

The Bank of England meets regularly to decide if it needs to raise or lower interest rates again. The next meeting is on 19 June 2025. If inflation keeps rising, the Bank may pause future rate cuts. But if the economy gets weaker, more cuts could follow.

The Bank’s current forecast is:

• 1% economic growth in 2025
   
• 1.25% in 2026
   
• 1.5% in 2027
   

These are lower than expected. This means the Bank may need to keep rates lower for longer to support growth.

Summary

Here’s a quick recap of what the latest interest rate cut means:

• The Bank of England has lowered rates to 4.25% to help the economy.
   
• If you have a mortgage, your payments may go down.
   
• Savers may earn less from bank accounts.
   
• Pensions and investments could see some changes.
   
• More cuts may come, depending on inflation and growth.

Even small changes in interest rates can have a big impact on your money. Now is a good time to check your finances and make sure you're getting the best deals.

The Bank of England’s interest rate cut is designed to support people and businesses during tough times. It may offer some relief for homeowners and borrowers, but it also means savers need to be smart about where they keep their money.

If you’re unsure what to do, speak to a financial adviser. Staying informed helps you make better money choices—especially when rates are changing.