Interest rates fall again – what it means for you
The Bank of England (BoE) lowered the base rate once again in May 2025. The MPC (Monetary Policy Committee) decided by a 5-4 vote to lower the rate by 0.25%, taking it to 4.25%. The Governor, Andrew Bailey, also hinted that further cuts could be arriving in the coming months (with the timing and pace uncertain due to global economic volatility).
This cut is the fourth this year, continuing a downward trend for UK interest rates in 2025. Yet, questions still hang over the UK economy.
The MPC vote was close, reflecting concerns among certain members about possible second-round effects (the indirect consequences arising from firms and workers responding to an initial inflation shock).
So, why are interest rates falling, and what could lie ahead? How could the economy – and UK household finances – be affected in the coming months? Below, our financial planners offer our thoughts.
Why was the base rate cut?
The rate-setting committee (MPC) was divided when it met in early May. Five voted to cut by 0.25%, two voted for no change, and two voted for a more aggressive cut.
A cut was widely expected in light of cooling inflation in recent months. In the 12 months leading up to March 2025, the CPI had dropped to 2.6% – closer to the BoE’s target (although it rose to 3.5% in April 2025, indicating a resurgence in inflationary pressures).
The BoE noted that disinflation had made “substantial progress” since 2023, with past economic shocks receding (e.g. the spike in global energy prices following Russia’s invasion of Ukraine).
The news of the cut was widely welcomed by homeowners and businesses, since it will make borrowing less expensive. However, savers stand to lose out as their banks are likely to pass down the falling rate to regular accounts.
What could lie ahead?
The MPC vote split reflects the wider uncertainty on the world stage right now. Currently, we still stand in the middle of US President Trump’s 90-day pause on his “reciprocal tariffs” originally announced in April on Liberation Day.
Investors and policymakers are still unsure how White House policy might unfold. Will the tariffs be brought back after 90 days? If so, what would be the impact on global trade?
Fears have been lowered somewhat by the UK-US trade deal announced in May, which lowered tariffs on certain goods to encourage bilateral trade.
The BoE has also suggested that a possible “trade war” between the US and other powers (e.g. China) could hit UK economic growth, but might actually lower UK inflation – e.g. due to China diverting goods originally bound to the US to the UK.
As such, policymakers are currently somewhat optimistic about the prospects of further rate cuts later in 2025. However, Governor Bailey has stressed these will be “gradual and careful”.
How rate cuts could impact homeowners
Approximately 1.6m fixed-rate mortgages are forecast to expire in 2025. With rates potentially falling in the coming months, we could see renewed competition amongst lenders – along with more opportunities for borrowers to get better deals.
It is worth noting, however, that many lenders are already pricing the expected BoE cuts into their deals. This raises an important question: Do borrowers stand to gain by delaying getting a new fixed-rate deal (hoping for further drops in mortgage costs)?
If the base rate falls again in 2025, fixed deals could become less expensive. However, this is not guaranteed. Currently, many major lenders are offering rates below 4%.
For those paying a fixed-rate interest rate of 3%, decisions about renewals could feel especially tricky. Around 800,000 of these mortgages are expected to expire each year between now and 2027. It is worth noting that mortgages are unlikely to return to 3% in the near future.
Preparing your financial plan
Interest rates don’t just affect mortgages. They have implications for your wider finances, such as savings, investments and pensions (e.g. annuity rates).
For instance, falling interest rates can make newly-issued bonds less attractive. This could be detrimental to investors whose portfolios lean more on such investments. However, falling rates can provide a tailwind to equities as firms gain more access to cheaper funding.
Saving money could become less appealing as interest rates on cash come down. This can exacerbate the tendency of cash to lose real value over time, since interest rates rarely match (let alone beat) inflation.
Falling interest rates can also have a “heating effect” on the economy as consumers have less incentive to save, and more incentive to spend (pushing up demand-pull inflation). This is partly why the BoE is emphasising a gradual approach to cuts. They don’t want a wage-price spiral.
The takeaway? There is still much uncertainty about interest rates and the wider economy. So, rather than building your financial plan based on what “might happen”, stick to the long-term strategy agreed with your adviser.
If you do have questions or concerns, then certainly discuss them with your adviser. If you’re yet to experience our service here at Castlegate, please get in touch to make sure you’re taking the right steps to safeguard your financial future.
Please note:
The content of this article is for informational purposes only and does not constitute financial advice. Please seek independent advice before making any financial decisions. Your capital is at risk. Past performance is not indicative of future results. Your home may be repossessed if you do not keep up repayments on your mortgage. Tax treatment depends on individual circumstances and may change.
