Base rate dropped to 4.25%

The Bank of England announced today that they are reducing their base rate to 4.25%. Why, and what does this mean for your finances?

The why is, as always, complicated.  Generally we see base rate cuts as an option to try to raise inflation if it has fallen below the target minimum of 1%, but recent decades have seen extremely low base rates for a very long time, establishing a new norm.  The recent increases were a direct response to the years of extremely high inflation we saw, but even then the base rate didn’t get back to pre-Financial Crisis levels.

This means we have to look at current circumstances to understand why the Bank decided to lower the rate at this time, especially as inflation presently seems to be within the target range of 1% to 3%.

In particular, you have likely seen the turmoil caused at the moment by Donald Trump’s announcement of tariffs for most of the USA’s trading partners.  This has understandably caused jitters in investment markets around the world as investors try to understand what the USA is doing – something which changes on a regular basis.

So What Does it Mean for Me?

For most people, nothing immediately.  There’s typically a lag between any announcement of a base rate change and an update to rates offered to you as a consumer.  The exception to this is if you have a base rate tracker mortgage – if you have one of these, the amount of interest you pay should be reduced almost immediately.

Over the longer term, I’d expect to see:

• Lower rates on mortgages and personal loans.  Not necessarily by the full amount, but this announcement will put some downwards pressure on lending rates which will hopefully feed through to consumers in due course.
• Lower rates on savings.  Less good news, as savings providers are generally much quicker to pass on cuts in full to savers, meaning you can expect your cash rates to get a bit lower.

Overall, it’s only a 0.25% rate cut – nothing like what we saw in the run up to the height of the Global Financial Crisis, so chances are you won’t see any immediate hit to your plans, but it is worth keeping an eye on future rate announcements to make sure that you stay on top of your financial decisions.

As always, if you’d like to discuss this further, please get in touch.