Bank of England cuts base rate to 4% despite inflation concerns

The Bank of England has announced an interest rate cut to the lowest level in two years, despite concerns about rising inflation and a weakening economy.

The Bank of England’s Monetary Policy Committee (MPC) voted by a majority of 5-4 to reduce the Bank Base Rate by 0.25% to a total rate of 4%.

In an unprecedented move, the first in its history, the nine-member committee was forced to hold two rounds of voting. Initially, four members backed cutting the rate to 4%, while another four voted to keep it unchanged.

Deciding not to follow the US Federal Reserve, the Bank of England has implemented its fifth interest rate cut since last August.

Reductions in bank rate over the past year

The MPC summary reports: “There has been substantial disinflation over the past two and a half years, following previous external shocks, supported by the restrictive stance of monetary policy.

“That progress has allowed for reductions in Bank Rate over the past year. The Committee remains focused on squeezing out any existing or emerging persistent inflationary pressures, to return inflation sustainably to its 2% target in the medium term.”

The report adds: “A gradual and careful approach to the further withdrawal of monetary policy restraint remains appropriate. The restrictiveness of monetary policy has fallen as Bank Rate has been reduced. The timing and pace of future reductions in the restrictiveness of policy will depend on the extent to which underlying disinflationary pressures continue to ease.”

Inflation could climb

Alongside the interest rate decision, the BOE has released its monetary policy report, which reveals inflation could climb in September.

The report says: “CPI inflation is forecast to increase slightly further to peak at 4.0% in September. Inflation is expected to fall back thereafter towards the 2% target, although the Committee remains alert to the risk that this temporary increase in inflation could put additional upward pressure on the wage and price-setting process.

“Overall, the MPC judges that the upside risks around medium-term inflationary pressures have moved slightly higher since May.”

Industry reaction to base rate cut

Richard Donnell, executive director at Zoopla comments: “While today’s cut in the base rate is welcome news for businesses and consumers, it’s unlikely to make a major difference to the cost of mortgages for home buyers or deliver a boost to house prices. The price of fixed rate mortgages already factors in the future path of base rates meaning average mortgage rates are likely to remain broadly where they are today.

“However, changes to the way banks assess mortgage affordability over recent months have already delivered a 20% boost to what people can borrow with no change in average mortgage rates. This has been supporting unseasonably strong levels of housing market activity, with the most homes for sale in over seven years. This cut to the base rate will support more positive housing market sentiment amongst home buyers.

“Lenders are offering very competitive mortgage deals so it’s important home buyers talk to a mortgage broker to understand what they can afford and what this latest cut means for their home buying decisions.”

Welcome news for many buyers

Nathan Emerson, CEO of Propertymark, said: “Throughout the world, many central banks have faced considerable pressure to reduce interest rates, and the UK has been no exception. So, this news is extremely positive and remains consistent with what has been widely hoped for.

“While this news will be very welcome for many buyers and sellers who may be empowered to potentially borrow more to finance their next house move, inflation is still above the Bank of England’s target rate of 2%.”

Lowest level in over two years

Ryan McGrath, Director of Second Charge Mortgages at Pepper Money, said: “Interest rates have fallen to their lowest level in over two years, providing immediate relief for customers on tracker products who will see reduced monthly payments.

“This improved rate environment makes second charge mortgages increasingly attractive, particularly for homeowners locked into favourable primary mortgage rates who need additional funding without disrupting their existing arrangements.

“While today’s modest rate cut signals measured caution rather than a fundamental shift, it creates opportunities for those whose circumstances fall outside traditional lending criteria.

“With property transactions remaining subdued and economic pressures mounting, including falling payroll numbers and rising unemployment, secured loans offer a vital lifeline, allowing homeowners to unlock equity to for necessary home improvements or to consolidate high-interest debt into a single, manageable payment at typically lower rates.”

One more Bank Rate cut before the end of the year

Matt Smith, Rightmove’s mortgage expert says: “As expected we now have the third Bank Rate cut of the year, with the Bank continuing along its forecast trajectory. Mortgage lenders have had a bit of room to reduce rates over the last week, owing to the ongoing developments around global tariffs.

“However, we expect that lenders will use the headline of today’s cut as the catalyst to reduce their rates a little further, though lender competition remains fierce and we don’t expect major rate drops.

“Lenders have been competing for business in a market which has the largest supply of homes for sale in a decade. A combination of rate cuts and changes to buyer affordability criteria are helping many home-movers to responsibly borrow more towards the home that they want.

“The market expects there will be one more Bank Rate cut before the end of the year, with an outside chance of two. Any further cuts would likely see this cycle repeat again – with lenders using it as an opportunity to reduce rates a little more. It bodes well for the second half of this year, with further mortgage rate reductions and stable prices likely to encourage more activity.”

Unlikely to trigger a significant upswing in housing market activity

Simon Dawson, Chief Revenue Officer, at Outra said: “The Bank of England’s base rate remains a central force shaping the UK housing market. Historically, lower interest rates have reduced borrowing costs, encouraged home buying, and supported house price growth. However, this relationship is never purely mechanical; it is influenced by a broader mix of factors, including employment trends, consumer confidence, and developments in the global financial landscape.

“With the Bank of England today deciding on a 25-basis point cut, market conditions appear set to support the current mild house price growth observed across several leading indices. Yet even with this reduction, it’s unlikely to trigger a significant upswing in housing market activity. Instead, a more stable and measured trajectory is expected to continue, barring any major economic shocks.”

Competitive pricing environment

Steve Cox, Chief Commercial Officer at buy-to-let lender, Fleet Mortgages: “Today’s decision by the Bank of England to cut Bank Base Rate to 4% is both welcome and necessary, given the current economic backdrop.

“With GDP falling in both May and June, there has been a growing expectation that the MPC would have to act, even with inflation rising in June and being above the 2% target at 3.6%. In a sense it shows the Bank has sensed there is a trade-off here and has come down on the side of trying to improve economic growth.

“Many analysts had warned of the risks of holding rates too high for too long, and this cut helps to ensure monetary policy does not compound those pressures while also delivering a clear boost for borrowers and the housing market.

“For the buy-to-let sector, this decision will filter through to swap rates, creating an even more competitive pricing environment for advisers and their landlord clients.”

Safe to stimulate more activity

Jeremy Leaf, north London estate agent and a former RICS residential chairman, says: “Anticipation of a cut in base rate has already applied downward pressure on mortgage payments and helped drive the increase in mortgage approvals announced at the end of last month.

“After weighing concerns about inflation with a need for growth, the Bank clearly decided it was safe to stimulate more activity. The housing market will play its part with a positive multiplier effect on other parts of the economy crucial to job and social mobility.

“The reduction will help to tip the buyer balance for some from ‘why?’ to ‘why not?’ and allow borrowers to plan ahead with more confidence to take on debt.”