The Bank of England (BoE) has reduced interest rates to 4.75% as inflation sits below its 2% target for the first time in three years.
The Bank’s Monetary Policy Committee (MPC) voted by a majority of 8–1 to reduce interest rates by 0.25 percentage points. Hawkish Catherine Mann preferred to maintain Bank Rate at 5%, but was outvoted.
The BoE said it is appropriate to take a “gradual approach to removing policy restraint” — ie, cutting interest rates. The minutes of this week’s meeting said: "Monetary policy will need to continue to remain restrictive for sufficiently long until the risks to inflation returning sustainably to the 2% target in the medium term have dissipated further.
"The Committee continues to monitor closely the risks of inflation persistence and will decide the appropriate degree of monetary policy restrictiveness at each meeting."
It comes after the BoE cut rates for the first time in more than four years in August , when inflation fell to its 2% target. Threadneedle Street held the rate at its September meeting ahead of the release of official inflation figures , which now show it eased further to 1.7% over the past year.
Governor Andrew Bailey said: “Inflation is just below our 2% target and we have been able to cut interest rates again today. We need to make sure inflation stays close to target, so we can’t cut interest rates too quickly or by too much. But if the economy evolves as we expect it’s likely that interest rates will continue to fall gradually from here.”
The BoE warned that the “combined effect” of the increase in employer national insurance contributions (NICs) and a sharp rise in the minimum wage were “likely to increase the overall costs of employment”.
Historically, rate cuts have been used to lower borrowing costs for consumers and businesses, stimulating economic activity.
A rate cut will be good news for first-time buyers trying to get on the housing ladder and those having to renew their mortgage.
For the average UK homeowner with a 75% loan-to-value (LTV) ratio on a tracker mortgage, a 0.25% cut could reduce monthly payments by £32, or £384 annually, according to calculations by TotallyMoney. When combined with the 0.25% reduction in August, this totals a monthly saving of £63, or £756 a year.
Alastair Douglas, CEO of TotallyMoney, told the Express : “While the days of 1-2% mortgages may feel like a distant memory, the Bank of England’s rate cut will feel like good news to many.”
The average two-year fixed mortgage rate is now 5.4%, according to data from Moneyfacts, while a five-year deal has an average rate of 5.11%. This rate cut comes shortly after chancellor Rachel Reeves announced £70bn in additional annual spending, financed by increased business taxes and new borrowing.
Read more: UK house prices hit record high in October
The Office for Budget Responsibility (OBR) has warned that the increased public spending could fuel higher inflation, but it may also support stronger economic growth.
The BoE said: “The impact of the budget announcements on inflation will depend on the degree to and speed with which these higher costs pass through into prices, profit margins, wages and employment.”
Chancellor Rachel Reeves, said: “Today’s interest rate cut will be welcome news for millions of families, but I am under no illusion about the scale of the challenge facing households after the previous government’s mini-budget.
“This government’s first Budget has set out how we are taking the long-term decisions to fix the foundations to deliver change by investing in the NHS and rebuilding Britain, while ensuring working people don’t face higher taxes in their payslips.”
Amid budget fears, markets are now less optimistic about the prospect of further rate cuts in the near term.
"The consensus (among economists and investors) is that the budget will provide a temporary boost to growth and inflation and that this will slow the pace of rate cuts,” Julian Jessop, economics fellow at the Institute of Economic Affairs, wrote on X.
Paul Dales, chief economist at Capital Economics, also questioned whether the BoE would follow up with another cut in December. "At the moment, though, we think the Bank will keep rates on hold at the [December] meeting," Dales said, though he still expects rates to eventually fall to 3%, which is lower than the 3.5%-3.75% range currently priced into the market.
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The Bank's Monetary Policy Committee (MPC) meets eight times a year to set rates. Its final monetary policy decision before the end of the year is on 19 December, with the first of 2025 occurring on 6 February.
Meanwhile, the US Federal Reserve is expected to announce a quarter-point rate cut later on Thursday, bringing its benchmark rate to approximately 4.6%. This comes just one day after Donald Trump won the presidential race .
Analysts suggest that US inflation could rise under a Trump administration, particularly due to expectations of higher tariffs on imports, which would give the Fed less room to ease interest rates.
Powell’s current term as chair expires in May 2026 and Trump previously said he will not reappoint him.
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