On 7 August 2025, the Bank of England’s Monetary Policy Committee (MPC) voted by a narrow 5–4 majority to cut interest rates by 0.25%, bringing the base rate down to 4%.
It’s the third cut this year and is set alongside the Bank’s admission that inflation is expected to rise to before the end of the year, after falling from the highs seen last year.
Consumer Pricing Index (CPI) inflation rose slightly to 3.6% in June and is expected to peak around 4% in September. The Bank now expects this to fall back toward the Bank’s 2% target three months later than planned, in Q2 2027.
More rate reductions may follow, but only if the data allows. For now, here’s what this latest cut could mean for your money.
Bank of England’s (BoE) rate-setting committee voted to cut interest rates by 0.25% to 4%
How a 0.25% interest rate cut could affect your finances
Between December 2021 and August 2023, interest rates rose rapidly in response to soaring inflation. Now that rates have moved consistently in the opposite direction, what could that mean for you?
A reduction in the base rate typically results in banks and building societies lowering their interest rates on savings accounts and mortgages. Interest rates on other types of debt tend to also fall, while a change in the base rate can also trigger movement in the stock and bond markets.
1, As saving rates fall, cash might become less attractive
After peaking in late 2024, savings rates have been gradually falling for several months, and this latest base rate cut to 4% could accelerate the trend.
Banks and building societies have been reducing the interest they pay on easy-access and fixed-rate savings accounts. Combined with inflation, still running above 3.5%, it will be harder to grow your money in real terms.
If the rates on your accounts do fall, you may be able to secure better returns on your cash by shopping around for a new savings account.
Using tax-efficient wrappers such as a Cash ISA could help you shield your interest from Income Tax.
For long-term goals, it may also be worth considering whether part of your cash savings could work harder in investments. Stocks and Shares ISAs, for example, offer tax-free growth and income potential, although investment values can fluctuate and you may get back less than you invest.
2, Mortgage rates may reduce as interest rates fall
A base rate cut often means good news for borrowers, but the benefit you see will depend on the type of mortgage you hold.
- Fixed-rate mortgages: If you’re on a fixed deal, your payments won’t change until the end of your term. However, new fixed-rate deals may become slightly cheaper, which could help when it’s time to remortgage.
- Tracker mortgages: These move in line with the base rate, so you’re likely to see your rate and monthly repayments fall almost immediately.
- Variable-rate mortgages: These depend on your lender’s Standard Variable Rate (SVR), which often, but not always, tracks the base rate. Check with your lender to see how your rate might change.
Lower rates can also support property prices, as affordability improves. And for landlords, falling mortgage costs may boost rental income, but it’s wise to keep a close eye on tax implications and portfolio strategy.
3, Lower rates could boost investment markets
A falling base rate can provide a lift to the stock market. There are several reasons for this:
- Cheaper borrowing for companies can lead to increased investment and growth.
- Consumers with lower debt repayments may have more disposable income to spend.
- People are more likely to borrow to buy big-ticket items, increasing consumption.
If you’re already invested in the stock market, directly or via a pension or ISA, your portfolio could benefit from this dynamic. That said, markets remain sensitive to inflation expectations and economic data, so it’s important to stay diversified and focused on your long-term goals. Remember that the value of investments can go down as well as up, so you may not get back the full amount you invest.
4, Bond values may rise as yields fall
Lower interest rates also affect bonds, particularly those already held in investment portfolios.
As new bonds are issued with lower yields, existing bonds with higher rates become more attractive. This can lead to a rise in bond prices, which may boost the value of fixed income holdings in your investment portfolio or pension fund.
5, Business owners could benefit from lower borrowing costs
If you run a business, falling interest rates may reduce your cost of borrowing, whether you’re financing a new project, managing cashflow, or looking to invest in growth.
At the same time, lower rates could stimulate consumer confidence and spending, which might increase demand for your products or services.
However, it’s worth noting that the broader economic picture remains subdued, with underlying UK GDP growth still sluggish and spare capacity building in the labour market.
What next?
With inflation not yet back at target, and another temporary rise expected in the coming months, the Bank of England has signalled it will tread carefully. The direction of travel is downward, but the pace will be data-dependent.
If you’re unsure how changing rates and inflation might impact your long-term plans, talking to a financial planner could help you stay on course and make informed decisions.
Get in touch
If you’re looking for help with building a personalised financial plan, call us on 0800 915 0000, or alternatively use our contact form here to set up an initial appointment.
Disclaimer
The information within this article was correct at the time of publishing, but laws and tax rules are subject to change. Your circumstances and where you live in the UK may also have an impact on your tax treatment.
To learn about the government’s most recently-announced changes, please read our latest budget roundup: 2024 Autumn Budget Update
Related Posts
7 August 2025
Read More
7 August 2025
Read More
12 July 2024
Read More
5 February 2024
Read More
