Lowest level in two and a half years
Interest rates have been cut to 4% by the Bank of England (BoE) Monetary Policy Committee in a move that was forecasted.
So far, the BoE has opted to cut rates twice this year (February and March) while holding at the last one in June.
Now the 4% rate cut means that interest rates have fallen to the lowest level in two and a half years as BoE aims to support UK growth. The 25-basis point move was already predicted by many economists.
Standard Life managing director for retail direct Dean Butler said today’s cut continues the BoE’s “measured approach” to easing monetary policy.
“While not unexpected, it reinforces the Bank’s cautious response to a challenging economic backdrop. Interest rates are now at their lowest level in two and a half years, reflecting growing concerns about economic momentum and a softening labour market,” he said. “While inflation remains way above the 2% target, the Bank is clearly attempting to support growth without reigniting price pressures – a delicate balancing act.”
Bulter highlighted that for borrowers, particularly those on variable rate mortgages or nearing the end of fixed-term deals, this move offers some relief. However, he said that with household budgets “still under strain” from high living costs, the impact may be gradual rather than immediate.
“The path ahead remains uncertain, and further rate cuts in 2025 are not guaranteed,” he cautioned.
“Savers face a more complex picture. Retail cash rates may begin to fall and with inflation still elevated, real returns on cash savings risk being eroded. Maintaining accessible cash for short-term needs remains sensible, but it’s increasingly important to consider long-term strategies. Investing through tax-efficient vehicles like ISAs and pensions can offer the potential for inflation-beating growth.
“While markets can fluctuate, a diversified, long-term approach can help people to build up financial resilience.”
‘Advisers must continue to demonstrate value of professional advice’
Stonebridge business partnerships director Jo Carrasco highlighted that for advisers, “staying close to their customers and proactively demonstrating the value of their professional advice must continue to be their priority”.
She said: “Today’s rate cut sends a clear signal that the Monetary Policy Committee believes the greater risk now lies in a faltering economy rather than entrenched inflation.
“While inflation remains nearly double the BoE’s target, the balance has shifted. Wage growth is easing, the labour market is softening, and GDP data shows the economy retracted in May. Meanwhile, the Bank appears increasingly confident that inflation will roll back next year, creating room to begin loosening policy.
Interest rate cut ‘no surprise’ but path forward is ‘anything but clear’
Schroder’s senior economist George Brown noted that today’s rate cut is “no surprise, but the path forward is anything but clear”.
He said: “Jobs, growth and inflation figures all call for different policy prescriptions, as reflected in the unprecedented two rounds of voting needed to reach a majority.
“Given the uncertainty presented by the conflicting data, the committee is right to stick to its ‘gradual and careful’ mantra.”
Brown said that “nervousness” about the labour market might prompt another cut in November.
“But this will be difficult to justify unless disinflation is clearly underway,” he explained. “As such, we think there is a decent chance rates will not fall below the current rate of 4% this year.”
Quilter Cheviot head of fixed interest research Richard Carter said the BoE is getting “increasingly concerned” about the health of the UK economy.
He said: “Unemployment is rising, while growth has ground to a halt once again after what now appears to have been a false dawn in the first quarter.
“As such, the BoE, while still concerned about its level, is putting inflation fears on the back burner as it looks to provide some relief to businesses and consumers.”
Carter added that the market hopes the Monetary Policy Committee will “pull the trigger again” this year, but “as the division on the last few decisions shows, even that might be put in doubt with any small change to the data”.
He said: “Today’s vote was on a knife-edge and required a second vote, with one member voting for a bigger rate cut, while four voted for no cut at all. This divergence in views makes interest rate decisions hard to forecast and highlights the difficult position the UK economy is in.
The problem facing the UK is that the issues “show no signs of abating,” in the words of Carter.
He continued: “Speculation is rife about which taxes will be next to be raised at the upcoming Budget and that is likely to weigh further on growth and consumer confidence, just as it did last year. It is looking like some tax rises in the past year have backfired, with employers making job cuts and wealthier individuals leaving the UK.
“This should all point to a reduction in interest rates going forward too, just as we have seen in Europe. However, global trade policies still appear uncertain, and the UK is once again battling with inflation, when others in Europe are not. It is making the job for the BoE increasingly difficult as we continue to wait for some sort of economic corner to be turned.”
Isabel Baxter Professional Adviser