The Bank of England’s Monetary Policy Committee (MPC) has voted to cut rates by a further 0.25 percentage points, taking the base rate to 4.25 per cent. The move was widely anticipated by analysts and financial markets, but the nine rate-setters on the committee were divided on how to react to a changing outlook.
Only five members favoured the 0.25 percentage point decrease, while two voted for a ‘double’ 0.5 percentage point cut. Two other members, including Catherine Mann, voted to keep rates at 4.5 per cent. Mann was previously an outspoken hawk on the MPC, but has recently favoured bigger policy moves. In March, she argued that “a gradualist approach to monetary policy is no longer valid” given the impact on the UK economy of shocks from overseas.
The committee did highlight the risks to economic growth arising from ongoing trade tensions, stressing that the “prospects for global growth have weakened as a result of this uncertainty and new tariff announcements”. However, it added that the UK would not be hugely affected, and updated forecasts revealed that the MPC now expects inflation to rise to a high of 3.5 per cent in Q3. In February, rate-setters expected a higher peak of 3.7 per cent.
Today’s decision comes in the wake of a repricing of interest rate expectations in financial markets. Traders now expect interest rates to fall to around 3.5 per cent by the end of 2025. At the start of the year, markets saw interest rates falling to just 4 per cent by December, as the chart below shows.
Have tariffs changed the outlook?
In March, the Bank’s rate setters thought that tariffs had the potential to increase or decrease the UK inflation rate. Today, evidence seems to be pointing towards the latter. Wholesale oil and gas prices have fallen since what President Trump termed “liberation day”, while the value of the pound has increased – reducing import costs.
There could be more disinflation to come. Simon French, chief economist at Panmure Liberum, expects a rerouting of cheap Chinese imports to alternative (non-US) markets. “The reality is that Chinese producer price and core inflation dynamics are poised to be a powerful disinflationary impulse into global supply chains,” he said. This, coupled with tariff-induced risks to economic activity, has helped to strengthen the case for UK rate cuts.
How far will interest rates fall
Yet forecasters at the BoE still expect inflation to rise later in the year thanks to domestic forces. Rising utility prices will drive inflation upwards, as could the lingering impacts of April’s rise in employers’ national insurance contributions and the minimum wage. Crucially, the MPC will only continue to cut rates at pace this year if members remain convinced that the inflation rebound really is just a temporary ‘hump’.
Ruth Gregory, deputy chief UK economist at Capital Economics, believes that interest rates will fall by less than markets think over the next six months, ending the year at 4 per cent. Forecasts from Capital Economics suggest that markets are front-loading their rate cut expectations and underestimating the scope of easing in 2026. Their analysis suggests that interest rates could fall to a low of 3 per cent next year, rather than the 3.5 per cent that markets expect.
Read more from Investors’ Chronicle
What does this mean for mortgage rates
For borrowers on variable-rate mortgages, today’s cut will quickly translate to lower monthly repayments. Though fixed-rate mortgage holders will not see an immediate benefit, rate cut expectations are still driving lower rates for borrowers with deals up for renewal over the next few months.
Fixed-rate deals move with swap rates, rather than BoE decisions. Swap rates reflect where markets expect interest rates to average over the duration of the deal. As a result, mortgage rates tend to change when interest rate expectations move, rather than the BoE base rate itself.
The recent change in interest rate expectations has moved swap rates, and triggered a price war in mortgage markets, too. Rachel Springall, finance expert at Moneyfactscompare.co.uk, said that “as a flurry of lenders move to reduce their fixed mortgage rates, it could be a suitable time for borrowers to compare deals and consider refinancing”.
The Fed stays in ‘wait and see’ mode
The Federal Reserve kept US interest rates on hold at 4.25-4.5 per cent when its Federal Open Market Committee met this week. The move was widely anticipated, and according to the CME FedWatch tool, markets saw a less than 2 per cent chance of a May rate cut. US policymakers are reeling from the impacts of trade uncertainty, and a statement released alongside the decision said that the committee stood “prepared to adjust the stance of monetary policy as appropriate if risks emerge”.
Like many central banks, the Fed is balancing competing pressures of high inflation and slow growth. But in the US, inflation fears still seem to be winning out. Tariffs are expected to push up the price level, raising import prices and materials costs for domestically produced goods. But unlike elsewhere, the impact will not be offset by a rerouting of cheap imported goods. The latest Fed projections (issued in March) suggest that inflation will stick at 2.7 per cent this year, before dropping to 2.2 per cent in 2026.
Though concerns about a US slowdown are mounting, the latest figures should be taken with a pinch of salt. First-quarter GDP declined by an annualised rate of 0.3 per cent, but analysts attribute this to businesses and consumers ‘getting ahead of tariffs’. A 40 per cent surge in imports meant that net exports subtracted 4.8 percentage points from GDP.
Fed rate-setters will want to wait for more data before making further cuts, and traders now see just a 33 per cent chance of another quarter-point rate cut in June. Nevertheless, market pricing indicates that cuts will accelerate in the second half of the year, taking interest rates to 3.5-3.75 per cent by December, as the chart shows.
