The Bank of England has cut UK interest rates for the second time this year, lowering them from 5% to 4.75%. This decision by the Bank’s Monetary Policy Committee (MPC) comes as inflation falls below the 2% target, allowing policymakers more flexibility to reduce borrowing costs despite economic uncertainties following the recent autumn Budget.
Governor Andrew Bailey commented that while a gradual approach to rate cuts is necessary to keep inflation near its target, rates could continue to fall if economic conditions unfold as expected. This move is likely to ease some of the financial strain on borrowers who have faced higher mortgage and loan rates since interest rates began to rise three years ago.
The MPC took into account the recent Budget from Chancellor Rachel Reeves, which included tax increases for businesses. This fiscal policy is expected to contribute a peak 0.75% boost to economic growth within a year, though it will also nudge up Consumer Prices Index (CPI) inflation by about 0.5% in late 2026. As a result, inflation is now projected to reach the Bank’s 2% target in the second quarter of 2027, a year later than previously forecast.
The Committee highlighted uncertainty in the job market, with businesses facing higher national insurance taxes and an increased minimum wage from April. The impact on inflation will depend on how quickly businesses pass on these costs through prices, wages, and employment, or whether they absorb them into profits. Should businesses raise prices for consumers, this could add pressure on inflation.
Meanwhile, the effects of past rate hikes are still filtering through, particularly for mortgage holders. About 800,000 fixed-rate mortgages with interest rates of 3% or less are expected to be refinanced each year until the end of 2027. Anticipating higher refinancing rates, some homeowners have already started cutting back on spending, the MPC noted.
