Interest rates have been cut for the fourth time in the past year after the Bank of England reduced them to 4.25% from 4.5%.
Bank governor Andrew Bailey said the slowdown in inflation was behind the cut, but warned recent weeks had shown “how unpredictable the global economy can be” with the US introducing wide-ranging tariffs.
The Bank considered a bigger cut to 4% due to concerns the global trade war could hit economic growth, but concluded this would be offset by a drop in energy bills and eventually lower inflation.
The decision comes as details of a tariff deal between the UK and US are set to be announced later.
Currently, most goods imported from the UK to the US face a blanket 10% tariff, with higher import taxes on steel and cars.
Speaking at a news conference following the Bank’s decision, Mr Bailey said it was “excellent that the UK is leading the way” with an expected deal with the US, which would “help to reduce uncertainty”.
Future UK rate cuts are likely to be “gradual and careful”, Mr Bailey added, as minutes of the Bank’s meeting showed the rate-setting committee was divided.
Of the nine members, five voted to cut rates to 4.25%, two voted in favour of a larger reduction to 4% and two voted for no change.
The Bank’s base interest rate dictates the rates set by High Street banks and lenders. The higher level in recent years has meant people are paying more to borrow money for things like mortgages and credit cards, but savers have also received better returns.
More than eight in 10 customers have fixed-rate deals, but could continue to face higher repayment costs when renewing.
However, mortgage rates have been edging down recently, primarily because the markets and lenders expect further rate cuts this year. On Thursday, the average two-year fixed mortgage rate was 5.14%, while a five-year deal was 5.08%, according to financial information service Moneyfacts.
About 600,000 homeowners have a mortgage that tracks the Bank’s rate, so rates being cut will have an impact on monthly repayments.
A typical tracker mortgage-holder is likely to see about £29 knocked off their monthly repayments following the latest cut, said the banking trade body UK Finance.
Homeowner Vanda, who has a tracker, told the BBC she had a “really good rate”, but then got “caught out” when rates were previously increased.
“A drop would help because I’ve just been made redundant, so that would help a wee bit. I don’t think it will ever go back to the way it was, though,” she said.
Interest rates are the Bank’s main tool in try to maintain the annual rate of inflation at, or close to, its target of 2%.
The most recent UK inflation figures show prices rose 2.6% in the year to March. However, the rate is expected to jump following a series of household bill increases at the start of April – including energy and water prices.
The Bank said it expected inflation to rise “temporarily” to 3.5% this year due to the bill increases before falling back due lower oil and gas prices set to feed through in the coming months.
US tariffs were also set to slow inflation, the Bank added, due to the impact of them on global trade leading to lower fossil fuel prices and the likely diversion of cheap goods from Asia to Europe which had originally been slated for America.
The theory behind increasing interest rates to tackle inflation is that by making borrowing more expensive, more people will cut back on spending and that leads to demand for goods falling and price rises easing.
But it is a balancing act as high interest rates can harm the economy as businesses hold off on investing in production and jobs.
The Bank expects UK growth for the first three months of this year to be stronger than it originally forecast at 0.6%, boosted by US firms stockpiling goods ahead of Trump’s tariffs coming into effect. The official figures are set to be released next week.
A boost in growth would be welcome news to the government, which has made growing the economy its main priority in order to boost living standards.
The government’s Budget decision to increase National Insurance last month for employers kicked in last month, but the Bank said the effect of the tax increase “appears to have been fairly small to date”, though it added business confidence had taken a hit in recent months.
A lot of firms are taking a “wait and see” approach to whether the UK economy picks up before hiring and investing, it said.
Chancellor Rachel Reeves said the latest rate cut was “welcome news”, but added: “There is more to do, and I know families are still facing cost of living pressures.
