The Bank of England announced a cut in its interbank lending rate – the base rate – at noon on August 7th. What was behind the decision, what does this mean for the economy, and what effect will it have for your own financial plans?
At Continuum we are providing answers for these and your other questions.
What exactly happened?
The Bank of England has cut interest rates to their lowest level in over two years.
The Bank of England’s monetary policy committee, the nine-member group that sets the base rate of interest in the UK every six weeks, voted 5-4 in favour of lowering borrowing costs by 0.25 percentage points to 4%. It is the fifth quarter-point reduction in a year and takes the rate to its lowest level since February 2023.
It could be a shot in the arm for the UK economy, but the committee’s experts had mixed views.
Why was there controversy?
Some were cautious, believing the cut would fuel inflation – which may be spiralling. Driven by higher food and energy prices and rising household utility bills, inflation is set to rise to 4% in September from its rate at the time of 3.6% , the Bank forecast. Inflation rose to 3.8% in July 2025.
The Bank is required to aim to keep inflation at 2%, a target it has not hit since last summer.
Against this was the need to stimulate the economy. Lower interest rates cut the cost of business borrowing, and tend to stimulate business activity, and so the economy in general. With concerns about the international situation, and worries about tax increases, the economy could probably do with some encouragement.
What does this mean?
When the bank cuts the base rate, we expect banks and other lenders to follow suit, cutting the interest rates they charge for borrowing including mortgages, and also cutting the returns they pay on savings.
But it may be too early for those of us with a home loan to celebrate. A cut in Bank base rate does not automatically mean a cut in mortgage rates, or monthly repayments.
Will my mortgage get cheaper?
Many existing residential mortgages are on a fixed rate, which means monthly repayments will stay the same. Those whose fixed-rate deals are ending could still be in for a costly shock – even at a 4% base rate, mortgage repayments are much higher than they were on five-year deals that are ending. Those affected could face a big jump.
The cut will mean lower borrowing costs for homeowners with a base-rate tracker mortgage. Their monthly repayments will fall, in line with the Bank’s cut.
Those on their lender’s standard variable rate (SVR) will be at the mercy of their lenders – who may cut their SVRs but are under no obligation to make any reduction.
What about new mortgage deals?
Earlier this year many lenders were cutting the cost of their new fixed-rate deals in a bid to bring in enough customers to meet their lending targets.
The Bank of England’s decision may encourage additional cuts – but mortgage pricing is based on the anticipated rate in the future, when the mortgage is in place. Many lenders will have already priced this cut and more reductions later this year into their lending offers.
That said, it may already be possible to find new fixed-rate deals below 4% for those with plenty of equity in their homes.
What about savings rates?
The returns on savings are not always tied to the base rate, but rather some are linked to the needs of savings account providers to attract customers.
However, account providers may be keener on cutting their rates when the base rate falls than increasing them when it is raised.
This means that the reduction is likely to be soon passed onto many savers who have easy-access accounts and or other accounts without fixed interest rates.
Higher interest paying accounts may be found but these are generally fixed-term offers that require tying your money up for years – and expect these top rates to vanish over the next day and weeks. Call us at Continuum without delay if you are you seeking a suitable saving option with a competitive rate of return.
Will investments be affected?
Most investments will not be directly affected by the news of a rate cut, but there could be an indirect effect on business confidence, willingness to borrow and ultimately profits.
Bonds – which offer guaranteed interest rates independent of the Bank’s decision – may see a boost when general interest rates fall.
Will my pension be affected?
Your pension contributions are invested on your behalf, and a change to interest rates can affect your pension value, depending on the type of pension and how it’s invested.
High inflation should have a positive effect on your state pension under the triple lock.
Problems may come if part of your retirement income comes from savings. These will pay less interest, reducing the cash you have coming in.
What happens next?
Some experts expect more interest cuts in the near future, especially if inflation remains under partial control, and the economy remains sluggish. The MPC will need to strike a balance between supporting growth and controlling inflation. If inflation stubbornly refuses to fall, the expected further cuts to the base rate may need to wait until the Bank can get closer to its 2% target.
However, there are some optimistic voices to be heard. The financial markets still seem to be anticipating a further quarter-point reduction by the end of the year and another by this time next year.
What should I do now?
Falling interest rates can be positive if you’re a borrower, or negative if you are a saver. Whichever category you fall into, having a suitable financial strategy to help keep your financial pans on track is essential.
So, in the current conditions, if you are looking at your mortgage, and especially if you are coming to the end of a fixed rate deal you might want to consider a base-rate tracker to benefit from lower payments in future if rates fall further as predicted.
However, as well as offering certainty, fixed rates are also typically cheaper than trackers at the moment. Two- and five-year deals are very closely priced.
You may want to decide if the certainty of a fixed rate is more appealing than the potential future savings of a tracker.
If you are looking at savings, it may be time to look at how you could help make your cash work harder. If you are to achieve the returns you want, you may need to shop around for the most competitive savings rate, consider locking your cash into a fixed rate bond or account – or start looking at investing rather than keep your cash in a savings account with dwindling returns.
Whatever your current situation, remember a fall in interest rate means you need to look at all your financial plans for the future. Financial projections sound daunting but knowing where your money will be going for the next few years and how much you will have to spend is fundamental to your financial security.
Where can I find some help?
At Continuum we can help you make those calculations, and help you find the financial solution you need, from the most appropriate mortgage deal to the most rewarding saving account. If it’s time to start investing, or if you need to look at your pension, we can provide the help you need.
Get the answers you need about the bank rate cut. Call us at Continuum today
Bank of England cuts interest rates to 4% – live updates – BBC News
UK inflation rises by more than expected to 3.8%, largely driven by air fares – BBC News
Base rate cut to 4% – Martin Lewis’ MSE News
Average five-year mortgage drops below 5% to lowest level in two years – BBC News
Average tracker mortgage borrower set to see £29 fall in monthly payments
Best Savings Accounts – Up to 4.80% Interest | MoneySuperMarket
Will interest rates continue to fall in 2025 | Expert Analysis & Predictions
The information contained in this article is based on the opinion of Continuum and does not constitute financial advice or a recommendation to a particular investment, retirement strategy or mortgage product and you should seek independent financial advice before embarking on any course of action.
Equity investments do not afford the same capital security as deposit accounts.
The value of an investment can go down as well as up and you may get back less than you invested. When investing Capital is at risk.
A pension is a long-term investment; the fund value can go down as well as up and this can impact the level of pension benefits available. Pension Income could also be affected by interest rates at the time benefits are taken. Pension savings are at risk of being eroded by inflation.
You may have to pay an early repayment charge to your existing lender if you remortgage.
Your home may be repossessed if you do not keep up repayments on your mortgage.
The Financial Conduct Authority does not regulate deposit accounts.
