The Bank of England has cut interest rates to 4.5%, its lowest level since June 2023.
Rates had been at 4.75% since the summer after two reductions, and came down again amid a backdrop of slow growth in the economy.
Here the PA news agency looks at what the decision means and what the Bank expects to happen to the economy.
– What happened to interest rates on Thursday?
The Bank of England’s Monetary Policy Committee (MPC) reduced the base interest rate to 4.5%, in a quarter-point cut.
It is the third time interest rates have been cut in the past six months, after they were brought down from a peak of 5.25%.
Borrowing costs had been increased over almost two years from the end of 2021 as policymakers sought to grapple with soaring inflation.
Seven members of the central bank’s nine-strong Monetary Policy Committee voted for the reduction, while two members voted for a sharper drop to 4.25%.
– What does it actually mean?
The base rate helps dictate how expensive it is to take out a mortgage or a loan.
Hikes in recent years have left mortgage rates much higher than was normal for most of the last decade.
Mortgage owners on tracker rates will witness a fall in monthly payments by £28.98, according to figures from industry body UK Finance.
However, the latest cut is unlikely to push other mortgage rates down immediately because it was largely expected and therefore priced in to mortgage offers.
The base rate also dictates the interest rates offered by banks on savings accounts, meaning these are likely to fall.
– What about inflation?
Raising interest rates is the central bank’s main way of reducing inflation – the measure of how fast prices increase over time.
The UK’s main measure of inflation, CPI (Consumer Price Index) inflation, dipped slightly to 2.5% in December, according to the Office for National Statistics (ONS).
The Government and the Bank of England have a target inflation rate of 2%.
The base interest rate dropped to this level last year, but the recent uptick in inflation has helped push the central bank to cut borrowing costs.
Thursday’s monetary policy report suggested that inflation could peak at 3.75% late this summer as energy price rises, higher water bills and a rise in bus fares contribute to an increase in the cost of living.
– Will rates continue to fall now?
The MPC, which makes rate decisions, is due to meet seven more times this year, when it can decide whether further cuts to interest rates are needed.
Bank of England governor Andrew Bailey reiterated his call for rates to fall “gradually”, saying the Bank should be “careful” as it looks at the wider economic backdrop.
Matt Swannell, chief economic adviser to the EY Item Club, said: “While the MPC stopped short of providing explicit guidance on where interest rates go from here, it indicated that more cuts are likely.”
ING’s Matt Smith said he expects rate-setters at the Bank to cut rates again in May, before potential further cuts in August and November to help get rates back down to 2%.
Currently, the Bank has said it expects interest rates to settle back at 2% in the final quarter of 2027.
– What does it mean for the Government?
Chancellor Rachel Reeves said the interest rate cut was “welcome news”.
The reduction in interest rates will help contribute towards a reduction in the bank’s debt interest payments over the coming year.
However, the Bank of England’s move to downgrade economic growth forecasts for 2025 – from 1.5% to 0.75% – will be a blow to Ms Reeves.
The Labour Government has made growing the economy a key policy priority and has linked long-term spending plans to expanding the economy and therefore tax revenues.
“I am still not satisfied with the growth rate,” the Chancellor added.
– Does this mean the economy is doing well?
Mortgage rates are still high, but a cut to the base rate is good news for the housing market.
Mr Bailey has also said the interest rate cut is part of efforts to deliver low inflation which is the “foundation of a healthy economy”.
However, he also stressed that there will be “bumps in the road”.
The latest figures showed that the economy is set to have contracted by 0.1% in the final three months of last year, after a flat third quarter.
It also halved the growth projection for 2025 to 0.75%, although it said GDP (gross domestic product) will be ahead of previous forecasts come 2026 and 2027.
– What impact could Donald Trump and US tariffs have?
The meeting comes after volatile week for the global economy, with the new Trump administration announcing plans for tariffs against China, as well as now-delayed tariffs against Canadian and Mexican imports.
The Bank of England stressed that the latest report had been written before these were announced.
However, it is also indicated that the introduction of tariffs, even if not directly against the UK, could impact global economic growth.
Mr Bailey said: “If there were to be tariffs that contributed to a fragmentation of the world economy, that would be negative for growth for the world economy. I hope that doesn’t happen, but that could happen.
“The impacts on inflation are much more ambiguous.
“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.”
