Interest rates live updates: Bank of England base rate cut to help slash mortgage bills

After the Bank of England cut interest rates to 4.75 per cent, governor Andrew Bailey pointed to a “good and encouraging” direction on falling inflation.

He said: “The disinflation process not only continues but actually has been faster than we expected, and that’s good and encouraging. There is greater uncertainty out there. There is greater global uncertainty without doubt.”

Referring to tax and spending increases announced in the autumn Budget, he added: “And of course there are domestic uncertainties. We need to obviously see how the Budget measures pass through in terms of their economic effects.”

Recent revisions in the UK’s National Accounts, compiled by the ONS, suggests that the recovery in GDP since the pandemic was stronger than previously estimated, particularly in late 2021 and early 2022, the Bank of England said.

The level of real GDP in the second quarter of 2024 was 2.9 per cent higher than the final quarter of 2019, which was 0.5 per cent higher than the previous estimate, the Bank noted.

Low interest rates are used to discourage people from piling up their money in savings. High interest rates encourage saving because people get a better return for the money you are putting away. This in turn has an effect on the price of goods.

When interest rates are low, people might spend more and this might cause retailers to put up the price of goods. When rates are high, demand might fall as people put more money into their savings pots. This, in theory, should drive down the prices of goods and services.

However, rising prices are not a direct result of interest rate changes. Other things, including the supply of money and underlying costs, affect prices and cause inflation. Interest rates can only help manage inflation, not control it directly.

My colleagues Albert Toth and Jabed Ahmed have more details on what impacts the latest cut will have:

The Trades Union Congress has welcomed the latest interest rate cut and urged the Bank of England to keep reducing its base rate.

“Today’s rate cut was the right decision, and the Bank of England should now keep moving with further reductions,” said TUC chief Paul Nowak.

“With inflation below the government’s target, ongoing cuts will support the economy and relieve cost of living pressures on households and businesses.

“It’s good that the Bank’s forecast has recognised the gains to growth that October’s Budget will bring. With increased investment, stronger public services and lower interest rates, the process of repairing and rebuilding Britain has begun.”

Shadow chancellor Mel Stride said: “This will be welcomed by millions of homeowners and builds on the work the Conservatives did in office to hold inflation down.

“However, the independent OBR and the Bank of England set out that as a result of Labour’s choices in the Budget last week inflation will be higher. The government must not undo the hard work the last government did.”

The pound strengthened after the Bank's latest rate cut and as it hiked its inflation outlook, partly due to measures announced in the Budget.

Sterling lifted 0.4 per cent against the US dollar to $1.293, and was 0.2 higher against the euro at €1.202.

Governor Andrew Bailey said UK inflation falling below its 2 per cent target meant policymakers had been able to cut rates to their lowest level since last June.

“We need to make sure inflation stays close to target, so we can’t cut interest rates too quickly or by too much,” he said.

“But if the economy evolves as we expect, it’s likely that interest rates will continue to fall gradually from here.”

As it forecast that policies in Rachel Reeves’ Budget would push inflation up by 0.5 per cent in 2026, the Bank of England said increases to employer taxes and the minimum wage could prove to be “more inflationary” if prices are passed on to consumers.

Laying out the expected effects of the policies on Thursday, policymakers wrote: “On the one hand, higher labour costs could constrain firms’ cash-flows if there was limited pass-through to pricing. This in turn could moderate wage growth and further loosen the labour market through reduced labour demand.

“On the other hand, the increase in labour costs could prove more inflationary if upward pressure on prices were passed on to consumers.”

Inflation is expected to stay higher for longer than previously forecast following spending and tax rises announced in Rachel Reeves’ Budget, the Bank of England said.

Headline consumer price index (CPI) inflation is set to return to the Bank’s 2 per cent target in the second quarter of 2027, about a year later than previously forecast.

Inflation will peak at about 2.8 per cent in the third quarter of next year, before falling during 2026 and early 2027, partly pushed up by energy prices and the Budget measures.

Policies in the Budget are forecast to add just under 0.5 percentage points to inflation in 2026.

Following the Bank of England’s decision to cut the base rate, chancellor Rachel Reeves, said: “Today’s interest rate cut will be welcome news for millions of families, but I am under no illusion about the scale of the challenge facing households after the previous government’s mini-budget.

“This government’s first Budget has set out how we are taking the long-term decisions to fix the foundations to deliver change by investing in the NHS and rebuilding Britain, while ensuring working people don’t face higher taxes in their payslips.”