The Bank of England has cut rates for the third time in just over six months, a move widely anticipated by markets.
In a statement this afternoon, the Bank said its monetary policy committee (MPC) had yesterday voted seven to two in favor of a 0.25% cut at its first meeting of the year, leaving the base rate at 4.5%. Two members had voted for a 0.5% rate cut.
“The MPC voted unanimously in favor of this month’s cut, a clear sign that despite the recent uptick in inflation, central bankers feel that at 2.5%, inflation in the UK is broadly under control, despite it resting above the bank’s 2% targeted level,” says Morningstar’s Chief European Strategist Michael Field.
“With plentiful equity market opportunities for investors in the UK, we believe further interest rate cuts over the course of 2025 will lighten the load for consumers and businesses alike. This should create a more supportive economic backdrop for commerce generally.”
Markets are currently pricing in another 50 basis points of cuts in 2025.
In response to today’s news, the FTSE 100 rose in London, a welcome uplift after negative sentiment regarding the effect of tariffs by the Trump administration dominated equity trading in the first half of the week. This morning the Index had shrugged off these fears to hit its second record high of 2025 ahead of the decision.
Meanwhile, the yield on UK 2-Year and 5-Year Gilts fell -7% and -5%, respectively.
Justifying the pace of its work, the Bank of England said in a statement this afternoon that sufficient progress had been made in the fight against inflation to warrant economic stimulus.
“There has been substantial progress on disinflation over the past two years, as previous external shocks have receded, and as the restrictive stance of monetary policy has curbed second-round effects and stabilized longer-term inflation expectations,” it said.
“That progress has allowed the MPC to withdraw gradually some degree of policy restraint, while maintaining bank rate in restrictive territory so as to continue to squeeze out persistent inflationary pressures.”
Today’s decision was also accompanied by a larger quarterly monetary policy report, whose aim is to give a more detailed perspective on what the Bank of England thinks is going on in the global economy. This bigger report is market sensitive as it helps professional investors and traders revise their expectations.
In it, the Bank of England subtly played down concerns about the effect of a second Trump administration on global economies.
“Overall, the Committee judges that, while there have been important developments since November, the forecast remains consistent with the second case that it has identified previously regarding the remaining persistent inflationary pressure,” it said.
“That is, conditioned on the market path of interest rates, the emerging margin of slack in the economy acts against some continuing second-round effects in domestic prices and wages in order for CPI inflation to fall back to around the 2% target in the medium term.”
What is the Bank of England’s Base Rate?
Today’s decision means the Bank of England’s base rate now sits at 4.5%, down from 4.75% in December, and 5% in August last year.
Prior to August’s fall, rates previously sat at 5.25%—the highest level for 16 years, and the result of surging inflation after the pandemic and a dramatic rise in energy prices following Russia’s invasion of Ukraine.
Though today’s decision means UK rates are once more falling, the process of lowering the base rate is taking longer than many anticipated. At the end of 2023, several commentators had expected a string of rate cuts from the Bank of England. By the close of 2024, there had been but two—on Aug. 1, and Nov. 7.
As of the latest data from the Office for National Statistics, UK inflation is currently 2.5%, above the BoE’s 2% target.
Will the Bank of England Continue to Cut Rates in 2025?
What the Bank of England will do to the base rate in 2025 has been the subject of fierce debate.
In January, markets were pricing in just one cut this year, with consensus just shy of agreement there would be a second.
However, some professional investment houses have already said they think markets are wrong. Last month, analysts at Goldman Sachs concluded the Bank of England could well cut rates as many as six times before spring 2026.
According to FactSet consensus, the Bank of England will likely make a further three 0.25% cuts this year; one in each of the year’s remaining quarters. This will leave interest rates at 3.75% by the end of December 2025.
Interestingly enough, however, this same consensus suggests that, after falling four times in total in 2025, rates will sit at 3.25% at the end of 2026, before rising to finish 2027 at 3.55%.
There is significant uncertainty surrounding these projections. However, if they are correct, they would seem to confirm that savers and investors will have to navigate an era of monetary policy where interest rates are “higher for longer.”
If the Bank continues to cut rates in the medium term, this will provide some relief to savers and investors with significant credit card debt.
However, this may not be the salve homeowners might expect. While falling rates make mortgage debt cheaper in theory, there are plenty of savers whose fixed-rate mortgage deals come to an end this year. Despite falling rates, they will find themselves paying more as they switch onto an overall-higher interest rate.
For some homeowners, this won’t matter, however. The majority of UK homeowners are now mortgage free.
That said, lower interest rates are expected to stimulate economic activity, as they mean less money is funneled into interest payments on debt—to the benefit of shops, businesses, and local economies. Little wonder equity traders and business owners welcome such news.
“Domestically, a BoE rate cut could renew investor interest in UK stocks,” said Daniela Sabin Hathorn, senior market analyst at Capital.com, in a Tuesday note.
“However, market sentiment will hinge on the central bank’s messaging. Any signals of further dovishness could reignite bullish momentum, though the medium-term trajectory will depend on upcoming economic data and fiscal policy developments.”
When is the Bank of England’s Next Meeting?
The Bank of England has a calendar of meetings and monetary policy publications, as the table below shows.
The author or authors do not own shares in any securities mentioned in this article. Find out about Morningstar’s editorial policies.
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