Bank of England cuts benchmark interest rate

The Bank of England has cut interest rates by another quarter percentage point, bringing down the cost of borrowing to 4.5%, writes economics and data Ed Conway. 

And in a sign that households can expect more cuts in the months to come, two members of the Bank's Monetary Policy Committee said they would have preferred to reduce rates even more, by a full half percentage point.

The Bank slashed its forecast for economic growth, however, forecasting that the economy will skirt clear of a formal recession only by the narrowest margin in the coming months, and downgraded its estimate of the economy's ability to generate income. 

And in a further blow to the chancellor, it said her latest growth plans, unveiled in a speech last week, will add nothing to gross domestic product growth in its forecast horizon.

The Bank's governor, Andrew Bailey, said: "It will be welcome news that we have been able to cut interest rates again today. We'll be monitoring the UK economy and global developments very closely and taking a gradual and careful approach to reducing rates further.

"Low and stable inflation is the foundation of a healthy economy and it's the Bank of England's job to ensure that."

The Bank's forecasts seem to indicate that there will be at least two further rate cuts in the coming years, and that that will be enough to bring inflation down towards its 2 % target. However, investors are betting on more cuts.

The Monetary Policy Report and Bank forecasts released alongside the decision today signal that the economy is due to have another few years of weakness. 

They cut the forecast for economic growth this year, next year and the following year, as well as raising the inflation forecast. The Bank also said that the economy's potential growth rate had dropped, down from 1.5% this time last year to 0.75% at the moment.

It said that while it expected last October's Budget to boost economic growth by 0.75% thanks largely to greater public investment, it also expected the National Insurance rise to weigh down on activity, in particular by pulling down employment.

It also warned that the tariffs threatened by Donald Trump on various economies posed a risk for economic growth in the coming years, though it has yet to incorporate them into its models.  

Cut could bring more buyers into the market and lower borrowing costs

The interest rate cut will be celebrated by anyone looking to get on the property ladder, with experts predicting it will bring more buyers to the market. 

Paresh Raja, chief executive of specialist lender Market Financial Solutions, said there has been "plenty of evidence of lenders changing rates" in recent weeks and the cut is another "positive step". 

"As ever, no sooner has the Bank of England delivered one decision than speculation begins about when it might cut the base rate again," he added. 

"For now, the focus from lenders and brokers has to be on taking a pragmatic, responsive approach, ensuring they support borrowers as best they can, particularly if a wave of new prospective buyers and investors does enter the market."

Alpa Bhakta, chief executive of Butterfield Mortgages Limited, said decisions by the Bank are the "most significant driver" of market sentiment and borrowing costs should be lowered after the decision today. 

"That said, challenges remain, and as lenders we must continue to provide flexible solutions and bespoke support to ensure brokers and property investors are well-positioned to thrive as the economic outlook improves," he added.

What should mortgage holders do now?

The base interest rate is down from 4.75% to 4.5%, which represents good news for mortgage holders.

Just how good that news is depends on the type of borrower you are, as L&C Mortgages explains.

If you're on a tracker mortgage, you'll be an immediate beneficiary.

L&C calculates someone on a £200,000 mortgage (paying over 25 years) could see payments fall by £29 per month.

There may be some advantage for those on standard variable rates (SVR), but this is not guaranteed.

The SVR - a rate decided by the lender that could change monthly - is typically higher than rates on fixed or tracker deals, L&C said.

So borrowers "shouldn't be lulled into a false sense of security as they could be paying well over the odds", the firm warned.

Fixed rate borrowers won't see an impact right away, but if you're coming to the end of your term, today's decision makes it more likely you'll have a lower rate for your next deal.

L&C advises borrowers to review rates three of four months before their current deal ends.

Three more rate cuts this year - Santander

The rate cut will bring some "light relief" to those getting a mortgage this year and a "boost to overall household confidence", the chief economist at Santander has said. 

"While this is a positive story overall, with rates sitting lower than they were two years ago, borrowers coming off five-year fixed terms will still be moving to rates significantly higher than their current rate," Frances Haque said. 

On how many more rate cuts there will be this year, Haque said: "Our forecasts are still pointing to a further three cuts this year - with the next to come in May, allowing the Bank of England to strike a balance between containing inflation, while boosting economic growth, and with that, supporting household confidence and the mortgage market."

What are markets expecting for rates in 2025?

Investors see a 74% chance of no change in the base rate next time the Bank's Monetary Policy Committee meets in April, according to data from the London Stock Exchange Group.

So far, traders are pricing in three more cuts this year - expected to come in May, June and November.

The Bank told us today, however, it thinks two cuts are more likely. 

Bank of England news conference ends

The Bank of England's news conference has come to an end. 

It has decided to cut interest rates by 4.75% to 4.5%, and in a blow to the chancellor, it slashed its growth forecast for the UK economy. 

Bank of England governor Andrew Bailey said he hopes more interest cuts will be possible down the line, but that the road ahead will be bumpy.

He said the Bank predicts inflation will rise from the current 2.5%, peaking at about 3.7% in the middle of the year,  before returning to the 2% target. 

"We live in an uncertain world and the road ahead will have bumps," he told the news conference. 

"Low and stable inflation is the foundation of a healthy economy and we will do our job to ensure that." 

Mortgage payments for quarter of homeowners 'will fall by 2028'

Mortgage rates are "coming down" and more than a quarter of homeowners should see their monthly payments decrease by 2028, the deputy Bank of England governor says. 

Speaking at the news conference, Dave Ramsden says mortgage rates peaked at just over 6% in 2023, but they are now "significantly lower" at less than 5%.

But he notes that they are "relatively high" compared to the years before inflation started to rise.

"Mortgage rates are coming down and that over time will support the economy," he adds.

"Over a quarter of mortgage accounts are expected to see monthly payments decrease between 2024 and 2028 quarter one because they're either on variable rates or they were fixed over that period of higher rates.

"That will support the mortgage markers and demand and... we emphasise that we think the housing market is picking up."

Tariffs could slow down global economy, warns Bailey

The Bank of England governor suggests that US tariffs and those announced by other countries in retaliation could slow down growth across the world.

Andrew Bailey says he hopes that isn't the outcome, but that it is possible. 

"The impacts on inflation are much more ambiguous," he adds. 

"It depends on the reaction of other countries to the tariffs, whether that leads to a redirection of trade and what impact that has on exchange rates.

"You can't make a clear and unambiguous prediction of what would happen to inflation in this context. We of course will follow it very closely." 

Disinflation is driving Bank's judgement - not 'stagflation'

There had been talk that inflation is now less important to the Bank's decision-making.

But Andrew Bailey shoots this down - specifically any suggestion that "stagflation" (when inflation remains high, but economic growth stays flat) has influenced the Bank's judgement today.

The governor says he doesn't use the word "stagflation" but wants to focus on the "second part of the term" - inflation.

"I really would come back to that point that our judgement today is really anchored on a view that we think the disinflation trend is in place," he says.

He adds this is the "heart" of the decision.

Chancellor's growth plan 'won't have effect for at least two years'

Our data and economics editor Ed Conway is at the Bank's news conference and asks the governor what impact the chancellor's growth plan will have on the economy. 

Andrew Bailey says he is a "very strong supporter" of the growth agenda, saying potential growth rates in the UK have been low since the 2009 financial crisis. 

He notes that government policies take time to materialise and the Bank is looking at a two to three-year timeframe for them come through. 

"But that does not mean it doesn't matter and won't have a positive impact," he adds. 

Deputy governor Clare Lombardelli jumps in, telling Conway that she expects to see changes to forecasts off the back of the government's plan in the "longer run". 

"These things are important to everyone right across the UK economy as we all know it's the only way to get rising real incomes in the long term," she adds. 

Bank rate 'not on pre-set path' as governor preaches 'careful' approach

With increased uncertainty and risks to inflation, the Bank rate is "not on a pre-set path", Andrew Bailey continues.

As our data and economics editor Ed Conway noted below at 12.07pm, forecasts are now hard to predict - and this is a stance echoed by the Bank of England's governor.

Bailey says there are "risks in the global economy" and warns projections are not "conditioned on any change in global tariffs" - possibly a nod to Donald Trump's threat to add tariffs to various countries and trading blocs. 

"This Bank rate is not on a pre-set path, with increased uncertainty and risks to inflation on both sides," he says.

"From the near-term outlook to UK activity in inflation and from developments in the global economy, we must also proceed carefully, judging the evidence afresh at each meeting."

The governor, asked why he's added the word "careful" to his description of the bank's outlook, says: "Let me emphasise... the greater uncertainty that we face in the current environment. And, as I said, that uncertainty is both domestic and global."

Bailey warns of rising inflation in 'uncertain world'

Bank of England governor Andrew Bailey kicks off the news conference by saying he hopes more interest cuts are coming - but that those decisions depend on inflation. 

He says the Bank predicts inflation will rise this year from the current 2.5%, peaking at about 3.7% before returning to the 2% target. 

"We live in an uncertain world and the road ahead will have bumps," he says, adding that the Bank rate will be set to ensure inflation hits 2% "sustainably". 

"Low and stable inflation is the foundation of a healthy economy and we will do our job to ensure that." 

He explains that inflation will be pushed up by energy prices and food and goods prices, hitting its peak in the middle of the year. 

Tories claim 'disastrous budget' will mean fewer rate cuts this year

While the Conservatives have welcomed the base rate cut, they say the government's "disastrous budget" is likely to mean fewer rate cuts than expected this year. 

Shadow chancellor Mel Stride said: "This will be welcome news for many families and businesses who have been hit hard by Labour's mismanagement.

"Sadly, their disastrous budget is likely to mean fewer rate cuts this year than previously anticipated.

"Under new leadership, the Conservatives will back business and our nation of entrepreneurs to create jobs and wealth.

"That is the only way to grow our economy so everyone can have a more secure future."

UK growth forecast slashed

Data and economics editor Ed Conway alluded to this below but it's worth picking out on its own: the Bank of England has just cut its growth expectation for the UK in 2025 from 1.5% to 0.75%.

This, clearly, is a significant blow for the government and chancellor.

The BoE says the UK will only narrowly avoid a recession - and that it estimates the economy shrank between October and December.

-SKY NEWS