The Bank of England has reduced interest rates to 4.25%, the lowest level in two years, down from 4.5%. Governor Andrew Bailey attributed the move to easing inflation but warned that recent global developments, particularly sweeping US tariffs, highlight the unpredictability of the global economy.

The Monetary Policy Committee was divided: five members voted for the cut to 4.25%, two supported a deeper reduction to 4%, and two opted to keep rates unchanged.

The rate cut coincides with the expected announcement of a new UK–US tariff deal later today. Currently, most UK goods face a 10% tariff when entering the US, with even higher duties on items such as steel and cars.

The Bank acknowledged that uncertainty surrounding global trade has “intensified” due to these tariffs, but suggested any long-term impact on UK growth and inflation is likely to be limited. It noted that rather than fuelling price increases, the tariffs may in fact dampen inflation as affected countries, such as China who seek to forge new trade routes.

UK inflation rose by 2.6% in the year to March. However, the Bank expects a temporary rise to 3.5% later this year due to April’s increases in household bills, including energy and water prices, before inflation falls again, helped by declining oil and gas prices.

Last month’s rise in National Insurance has had a “fairly small” direct impact so far, the Bank noted, although overall business confidence has weakened.

Governor Bailey reiterated the Bank’s commitment to “low and stable inflation,” stressing the need for a gradual and cautious approach to further rate reductions.

Historically, interest rates stood at 0.75% in January 2020, fell to 0.1% during the pandemic, and remained there until late 2021. They then climbed steadily to a peak of 5.25% in August 2023. Since then, rates have been lowered in stages, with the current 4.25% marking the fourth cut from last year’s peak and the second this year.

Interest rates are the Bank’s main tool for controlling inflation, with a target rate of 2%. The International Monetary Fund has forecast that the Bank could cut rates a further two times before the end of the year.

The Bank’s base rate influences borrowing and savings costs across the financial system. Higher rates in recent years have meant borrowers have faced increased costs for mortgages and loans, while savers have benefited from better returns. Around 600,000 homeowners with tracker mortgages will see their monthly repayments fall following the cut, though those on fixed-rate deals may still face higher costs when remortgaging.

Mortgage rates have been edging down recently in anticipation of further cuts. While increasing interest rates is a common tool to tackle inflation by making borrowing more expensive and curbing demand, it also risks stifling economic growth if businesses delay investment and recruitment.

Today’s announcement brings positive news for first-time buyers, as the widely anticipated base rate cut to 4.25% is intended to ease mortgage affordability pressures. The reduction should lead to lower interest rates on new mortgages, making home ownership more attainable for those looking to get onto the property ladder. While the full effects will take time to emerge, the move signals a welcome shift that may help alleviate some of the financial challenges currently faced by prospective buyers.

Despite wider uncertainty, the Bank expects UK GDP to have grown by 0.6% in the first quarter of 2025, outpacing earlier forecasts. Official figures are due next week. The government, which has made economic growth a central priority to improve living standards, will view this as a promising development. However, earlier this year the Bank halved its full-year growth forecast from 1.5% to 0.75%.