Introduction to Interest Rates
The Bank of England has decided to keep interest rates at 4.25%, following two cuts earlier in the year. Analysts believe that the Bank’s Monetary Policy Committee will announce further cuts later in 2025. But what does this mean for you?
What are Interest Rates?
Interest rates affect mortgage, credit card, and savings rates for millions of people. An interest rate tells you how much it costs to borrow money or the reward for saving it. The Bank of England’s base rate is what it charges other banks and building societies to borrow money, influencing what they charge their customers for loans and the interest rate they pay on savings.
Why Do Interest Rates Change?
The Bank of England changes interest rates to keep UK inflation at 2%. When inflation is above this target, the Bank can put rates up to reduce demand for goods and services and limit price rises. Once inflation is at or near the target, the Bank may hold rates or cut them to stimulate spending and economic growth.
Current Inflation Rate
The main inflation measure, CPI, was 3.4% in the 12 months to May 2025, still above the 2% target. Although this is far below the peak of 11.1% reached in October 2022, inflation remains a concern.
Impact on the Economy
The Bank of England also considers the performance of the UK economy and the global economy when making decisions about interest rates. The global economy has been affected by factors such as tariffs introduced by US President Donald Trump and conflict in Israel and Iran, creating uncertainty.
Future Interest Rate Cuts
The Bank of England has hinted that the next interest rate cut could come as soon as August. Some analysts believe that UK rates could fall to 3.5%. However, the world is still highly unpredictable, and it’s difficult to predict exactly what will happen to interest rates.
How Do Interest Rates Affect You?
Mortgages
Just under a third of households have a mortgage. About 600,000 homeowners have a mortgage that "tracks" the Bank of England’s rate. Although the vast majority of mortgage customers have fixed-rate deals, future deals are affected by interest rate changes. Mortgage rates are still much higher than they have been for much of the past decade, with the average two-year fixed mortgage rate at 5.11% and a five-year deal at 5.10%.
Credit Cards and Loans
Bank of England interest rates also influence the amount charged on credit cards, bank loans, and car loans. Lenders can decide to reduce their own interest rates if Bank cuts make borrowing costs cheaper. However, this tends to happen very slowly.
Savings
The Bank base rate also affects how much savers earn on their money. A falling base rate is likely to mean a reduction in the returns offered to savers by banks and building societies. The current average rate for an easy access savings account is 2.67%, according to Moneyfacts. Any cut in rates could particularly affect those who rely on the interest from their savings to top up their income.
Global Interest Rates
The UK has had one of the highest interest rates in the G7, a group representing the world’s seven largest "advanced" economies. In comparison, the European Central Bank (ECB) cut its main interest rate for the eurozone to 2% in June 2025, while the US Federal Reserve has held interest rates at 4.25% to 4.5%.
Conclusion
In conclusion, interest rates have a significant impact on the economy and individuals. The Bank of England’s decision to hold interest rates at 4.25% may have both positive and negative effects on mortgages, credit cards, loans, and savings. As the global economy continues to evolve, it’s essential to stay informed about interest rate changes and how they may affect your financial situation.
