Bank of England cuts base rate to 3.75%

The Bank of England has today reduced the base rate from 4.00% to 3.75%.

This move was anticipated by the financial markets, following news of the economy shrinking unexpectedly in October, and inflation falling by more than expected. 

The announcement sees borrowing costs at their lowest level since January 2023.

Reme Holland, Partner at Albert Goodman Chartered Financial Planners, provides this update on today’s announcement, explaining what has happened, why the decision has been taken and what the implications are for you, with specific consideration for those with mortgages and for business owners.

The Monetary Policy Committee has voted by a majority of 5-4 to lower the base rate, the interest rate the Bank of England charges commercial banks when they borrow money. 

The base rate underpins a wide range of interest rates across the economy, including mortgages, savings accounts, loans and business finance.

This reduction represents a move away from the highly restrictive policy stance that has been in place to tackle elevated inflation, as the Bank of England seeks to reduce inflation to its target rate of 2%. Yesterday’s announcement that CPI inflation had fallen to 3.2% - down from 3.6% the previous month – will have provided the Monetary Policy Committee with further confidence the time was right for another reduction in the base rate. 

The base rate reduction announced today is widely viewed as a measured and deliberate move. There is the prospect of further base rate cuts in 2026, however, these will be subject to inflation continuing to fall in line with expectations.

Economic growth in the UK has been subdued. Households have faced sustained pressure from higher living costs, while businesses have contended with higher borrowing costs and cautious consumer demand. By reducing the base rate, the Bank of England is seeking to support economic activity without undermining the progress made on inflation.

While price pressures have not disappeared, inflation has eased compared with recent peaks, reflecting the cumulative impact of earlier interest rate rises. Slower demand, easing supply pressures and a cooling labour market have all contributed to a more balanced inflation outlook.

Other major central banks – including the Federal Reserve in the United States - have begun to ease policy. The Bank’s decision reflects the need to balance domestic economic conditions with an increasingly supportive international monetary environment.

Importantly, this move does not mean inflation risks have disappeared. Future decisions will remain dependent on financial data, and interest rates may need to stay higher than historic norms for some time.

Today’s announcement was expected and had already been priced into mortgage rates offered by many lenders. 

For clients on variable rate or tracker mortgages, the reduction in the base rate will lead to a modest fall in monthly repayments. While the saving may appear small in isolation, it can make a meaningful difference to household cash flow over time. 

Additionally, those on variable or tracker mortgages may now wish to consider a fixed rate mortgage, with rates having fallen significantly since the base rate reached its recent peak at 5.25% in August 2023.

For those on fixed rate mortgages, there is no immediate impact. However, expectations of lower interest rates are already feeding into mortgage pricing. Clients approaching the end of a fixed rate period may start to see improved options emerge, so it remains sensible to review your mortgage arrangements early.

Lower financing costs can ease pressure on cash flow and provide additional flexibility when managing working capital.

However, uncertainty remains and one rate cut does not remove wider economic challenges. For some businesses, the changing interest rate environment may present an opportunity to refinance existing debt or reassess investment plans that were previously marginal.

This change in the base rate provides a timely opportunity to review your wider financial plans. We encourage borrowers to reassess lending arrangements, savers to ensure cash holdings remain efficient, and investors should check their portfolios remain aligned with long-term objectives.

Thoughtful, proactive planning remains key in navigating a changing economic environment. The team at Albert Goodman Chartered Financial Planners are here if you would like to discuss how the base rate reduction affects your personal or business circumstances.