The Bank of England Cuts Base Rate to 4.25%: What This Means for UK Mortgages and the Economy
- Clement Lai
- May 9
- 3 min read
The Bank of England (BoE) has reduced the Base Rate by 0.25%, lowering it from 4.5% to 4.25%. This marks the fourth cut within the past year and reflects the Bank’s cautious approach to balancing inflation control with economic growth amid ongoing global uncertainties. The Monetary Policy Committee (MPC) voted narrowly, with five members supporting the quarter-point cut, two favoring a larger 0.5% reduction to 4%, and two preferring to keep rates unchanged, underscoring differing views on the economic outlook.
A Gradual Downward Path Amid Global Trade Concerns
Governor Andrew Bailey signaled that the path for interest rates remains “gradually and carefully downwards,” though he refrained from specifying the timing or magnitude of future cuts. The Bank considered a larger cut to 4% but opted for a measured step, reflecting concerns about the impact of global trade tensions, particularly recent U.S. tariffs.
The recent UK-US trade deal announced alongside the rate decision was welcomed by Bailey as a positive development that reduces uncertainty and could lead to further agreements with the EU and India. Such trade deals are seen as vital to “rebuild the world trading system” and support UK economic growth.
Inflation and Economic Growth Outlook
Inflation remains above the Bank’s 2% target but is showing signs of easing. The Consumer Prices Index (CPI) rose by 2.6% in the year to March 2025, down from 2.8% in February, partly due to falling fuel prices. The BoE’s May Monetary Policy Report forecasts inflation peaking at around 3.5% in the third quarter of 2025, mainly driven by energy price adjustments, before gradually returning to the 2% target by early 2027-nine months earlier than previously expected.
Economic growth forecasts have been revised slightly upward for 2025, with the BoE expecting 1% growth this year, up from 0.75%, supported by a strong end to 2024 and robust early 2025 data. However, growth is expected to slow to 1.25% in 2026, down from earlier projections of 1.5%.
The BoE also highlighted that the U.S. tariffs could reduce UK inflation by 0.2 percentage points over two years but may trim the size of the economy by 0.3% after three years. The overall impact of tariffs on global trade is a significant factor in the Bank’s cautious stance.
Mortgage Market Implications
For homeowners, this rate cut offers some immediate relief, especially for the roughly 600,000 borrowers with tracker mortgages linked directly to the Base Rate. UK Finance estimates that a typical tracker mortgage holder could see monthly repayments fall by about £29 following the cut.
However, more than 80% of mortgage holders are on fixed-rate deals, meaning most will not see immediate changes until their current terms expire. Mortgage rates have been gradually easing, with the average two-year fixed rate at approximately 5.14% and the five-year fixed at 5.08%, reflecting lender expectations of further rate cuts this year.
Luxe Living International’s Perspective
At Luxe Living International, we view the Bank of England’s decision as a prudent response to a complex and evolving economic landscape. The cautious but clear indication of a downward trajectory for rates, combined with positive developments in trade policy, provides a foundation for more stable mortgage markets and improved borrowing conditions.
We advise prospective buyers and those nearing the end of fixed-rate mortgages to start exploring their options early. Locking in favorable deals ahead of time can help avoid slipping onto higher Standard Variable Rates (SVRs), which currently average around 7.5%. The Mortgage Charter’s flexibility to secure new deals up to six months before expiry is a valuable tool in this regard.
Looking Ahead
Market expectations for further rate cuts this year remain, though the likelihood of a cut at the June MPC meeting has diminished to under 20%, down from around 60% before the latest announcement. The BoE has emphasized that interest rates are not on “autopilot” and will be adjusted carefully in response to evolving economic conditions.
The next interest rate decision is scheduled for 19 June 2025 and will be closely monitored by borrowers, lenders, and investors.
At Luxe Living International, we remain committed to helping our clients navigate these changes with tailored advice and support, ensuring you can make the most informed mortgage decisions in this shifting environment. Whether you’re buying, remortgaging, or reviewing your financial plans, staying informed and proactive is key to success.
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