In its latest Monetary Policy Committee meeting, the Bank of England voted to hold the Bank Rate at 4.5pc. The move was widely anticipated.
This comes after disappointingly slow progress to rate cuts in 2024; there had been several on the cards at the start of the year, yet the Bank of England only granted two 0.25pc reductions.
There are still a lot of unknowns yet to play out in 2025, from the effects of Donald Trump’s trade tariffs, ongoing wars and geopolitical tension – plus uncertainty over the UK economy amid tax rises and job cuts.
The UK is grappling with weaker growth, with GDP contracting by 0.1pc in January. Inflation also remains sticky, particularly in services, and private sector wage growth is still running high at 6.2pc.
However, the assumption seems to be that the Bank of England will still reduce the Bank Rate gradually over the year, with a view to ending 2025 at below 4pc.
Interest rate cuts are broadly good news for mortgage holders and first-time buyers, as mortgage deals tend to follow central interest rates. However, other factors, such as swap rates, can also affect the interest charged by lenders.
For savers, meanwhile, lower Bank Rates can mean a reduction to savings interest.
Here, Telegraph Money explains what the Bank Rate outlook means for your mortgage, savings, pension and investments.
While those already on a fixed-rate mortgage will be unaffected by any Bank Rate decision, the 1.8 million people needing to remortgage in 2025 still have little chance of their mortgage costs going down, despite falling rates, because of how cheap home loans were two and five years ago.
At the time of writing, the average two-year fixed rate is 5.33pc and the five-year fix is 5.18pc, according to the analyst Moneyfacts, though the best deals will be cheaper.
Mortgage rates have remained steady over the past few weeks, with few if any lenders anticipating a bank rate cut. Halifax and HSBC have made minor reductions but there is little chance of more significant movements.
Nicholas Mendes of broker John Charcol said: “While today’s announcement was widely expected, there had been some hope of a rate cut in the coming months. However, the Bank’s decision signals a preference to keep monetary policy steady until there is clearer evidence that inflation is easing sustainably. With headline inflation rising to 3pc in January and expected to climb further by summer, policymakers remain cautious about moving too soon and risking a reversal of progress in stabilising prices.
“For now, the Bank is holding its nerve, keeping a close watch on how economic conditions evolve. With signs of a weakening labour market and ongoing concerns over business investment, the conversation around rate cuts is far from over—but today’s decision suggests the MPC isn’t ready to pull the trigger just yet.”
Any Bank Rate move usually has an immediate impact for those on a variable-rate deal.
According to UK Finance, the banking trade body, there are 591,000 homeowners with tracker mortgages and 540,000 on a standard variable rate.
Due to continual Bank Rate rises between 2021 and August 2023, those who gambled on tracker mortgages have long been waiting for a reprieve.
Tracker mortgages are tied to the Bank Rate, so mortgage holders with this kind of deal are unlikely to see their bills get cheaper until the next rate cut.
The average two-year tracker rate is 5.19pc, according to Moneyfacts. The average standard variable rate (SVR) as of 1 March is 7.68pc.
Lenders are free to change their SVR whenever they wish, but many do so in line with rate cuts.
Borrowers are automatically put onto their lender’s default SVR if they do not remortgage on to a new deal when their original fixed-rate or tracker deal comes to an end.
Since the Bank of England first began lowering rates last August, savings rates have begun to fall more quickly. The average easy-access saving rate is 2.77pc, according to Moneyfacts.
The highest rates pay almost 5pc, so it still pays to shop around.
Easy-access cash Isa accounts currently pay 4.12pc on average, with the highest rates also around 4.5pc. Returns on Isas are tax-free, and up to £20,000 a year can be spread across multiple accounts.
Claire Jones, of cash deposit platform Flagstone, said: “Anyone with cash to spare and the opportunity to move it would be wise to seek out the best longer term rates on offer and act now to take advantage of them. It’s not hard to still find rates that exceed inflation by 1.5x.
“We’d say that those who don’t need immediate access to their savings should lock into the best longer term rates now and enjoy the certainty that a fixed rate offers.”
Most savers should not make changes to their pension based on the Bank Rate, as the further you are away from retirement the more time you have to recover any losses in the stock market.
However, the turmoil in the gilt market at the start of the year spurred an increase in annuity rates, making them an appealing prospect – but the trend could be short-lived as rates are expected to fall with cuts to the Bank Rate.
It’s possible to buy an annuity with your pension, in exchange for a guaranteed income in retirement. Before interest rates started rising, they had long been out of fashion as they offered very low payout rates. However, in the past year they have risen to heights not seen since the 2000s.
Pete Cowell, head of annuities at Standard Life, part of Phoenix Group, said: “Looking ahead, we expect annuity rates, as well as the demand for these types of products, to remain strong, especially with pensions being brought into scope for inheritance tax from 2027. Wealthier savers may be encouraged to access more of their pensions, with annuities becoming an increasingly attractive way of doing so.
“It’s also encouraging to see growing industry and adviser recognition on the flexible ways a guaranteed income can be incorporated into a broader decumulation strategy, using annuity products and options to create more tailored retirement journeys that meet specific needs in retirement.”
There’s also the issue of inflation, which has remained above the Bank of England’s 2pc target for the past few months; it rose to 3pc in January. These are all factors which could affect future rate decisions.
Tim Parkes, CEO of RAW Capital Partners, said: “Any rate reduction is positive news for the lending and property markets. Although rates may never return to the historic lows seen between 2008 and 2021, they are trending in a favourable direction, making it easier for homeowners and investors to manage both current and future loans.”
Lower interest rates can provide a boost to the valuations of certain companies, such as those that are prized not for their profits today but the prospects of their future earnings. These are worth more if inflation and rates are expected to fall.
However, an investment portfolio that is invested across the entire global stock market is likely to be influenced more heavily by the American central bank’s decisions rather than those made on Threadneedle Street. Even the companies that make up the FTSE 100, London’s benchmark index, derive most of their revenues from overseas.
The US Federal Reserve held interest rates this week, due to uncertainty over the impact of the President’s tariff announcements. However, two cuts are still expected this year.
Meanwhile, the European Central Bank cut its interest rates by 0.25 basis points last week.
