The Bank of England has cut interest rates from 4.75% to 4.5%, leaving rates at the lowest since June 2023. Some members of the Bank’s committee even wanted a larger cut to 4.25%.
The UK interest rate cuts signal a change. But what do they mean for the average person?
In this article, we will explain what these changes mean for your personal finances, especially if you are borrowing, saving or worried about the cost of living.
Interest rates represent the cost of borrowing money or the return on savings and are set by the Bank of England to regulate the UK’s economic activity.
Lower interest rates make borrowing more affordable in an attempt to boost spending and stimulate the economy. This cut comes after the Bank decreased its UK economy forecast from 1.5% to 0.75%.
The recent rate cut from 4.75% to 4.5% was put in place to rouse the economy amid sluggish growth, high borrowing costs and reduced consumer spending.
However, it is not all positive. Interest rate cuts in the UK mean savers will get smaller returns, so your money won’t be working as hard in a savings account.
Let’s break down these impacts further based on borrowing, saving and the general cost of living.
The new interest rate makes borrowing more affordable, which is welcomed news for mortgage holders, personal loan holders and credit card users. However, the benefits depend on the loan type and individual terms – the interest doesn't automatically drop.
For example, if you have a variable or a tracker mortgage, your monthly payments might decrease as lenders adjust to the lower interest rates. Fixed-rate mortgage holders, though, won't see a change until it is time to remortgage.
Similarly, rates for new loans may drop, but existing credit card debt won't change much unless your provider lowers rates.
Lower interest rates mean savers earn less on their deposits, making it harder to grow savings. This is the less exciting part of the Bank of England interest rate changes.
You can mitigate this drop in savings growth by switching to fixed-term savings accounts. These types of savings accounts usually offer better rates for locking up money for a period of time.
If you are willing to take more risks with your savings, you can also explore alternative investments like bonds or money market funds, which can help maximize returns. Make sure you thoroughly research any investment option you choose before making your final decision.
And what about the cost of living?
As mentioned, lower interest rates encourage borrowing and spending, which can boost the economy and ease some cost-of-living pressures we have been experiencing for the last few years.
In addition, when possible, cheaper loans and mortgages leave people with more disposable income.
However, there is a drawback – if spending increases too much, inflation could rise, pushing up prices for everyday essentials.
While rate cuts help in the short term, their long-term effects depend on how inflation and wages respond to the changes. Right now, inflation is expected to rise to 3.7%, so it is not the best-case scenario for Brits.
This blog gives the latest overview of the UK interest rates so far in 2025. Although mortgage and borrowing rates are falling, inflation is starting to rise slowly again. This may add extra pressure on UK households. While rising bills and mortgage costs remain a concern, inflation will ease at some point, and wage growth may provide some relief for people across the nation.
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