Yesterday, the Bank of England (BoE) announced its decision to hold the base interest rate steady at 4.5 percent.
Holding the rate has implications for next week's Spring Statement, where Chancellor Rachel Reeves faces the challenge of addressing a £20 billion hole in public borrowing, overall borrowing which has now reached over £130 billion this year. Higher borrowing costs, driven by elevated interest rates, constrain public spending and increase debt servicing costs. It's already being leaked there will be massive spending cuts and as yet unconfirmed tax adjustments and the interaction between fiscal and monetary policy will be critical in shaping the economic outlook.
The rate decision, whilst widely anticipated, came at a critical juncture for our economy, which is grappling with a trifecta of persistent inflation, subdued growth, and global uncertainties.
The BoE’s Monetary Policy Committee voted 8-1 in favor of maintaining the current rate. Inflation, which stood at 3 percent in January 2025, remains above the Bank’s 2 percent target and is projected to peak at 3.75 percent by the third quarter of the year.
The decision to hold rates reflects the BoE’s concern over inflationary pressures driven by wage growth, energy costs, and global trade tensions. At the same time, the UK economy has shown signs of stagnation, with GDP growth revised down to 1.5 percent for 2025.
Lower rates can stimulate growth by encouraging consumer spending and business investment. However, they can also erode the value of savings and risk overheating the economy. Conversely, higher rates help control inflation but can dampen economic activity and increase the cost of public borrowing. It's a tough decision.
Market reactions to the decision were muted. The pound remained stable against major currencies, while bond yields reflected investor caution. For households and businesses, however, the implications are more pronounced. Mortgage holders with variable rates continue to face elevated costs, while savers benefit from higher returns. Businesses, on the other hand, will continue to grapple with higher borrowing costs, which could dampen investment and hiring plans.
The decision to hold rates at 4.5 percent marks a significant shift from the aggressive tightening cycle of 2022–2023. During this period, the base rate peaked at 5.25 percent as the Bank sought to combat inflation, which had surged to over 10 percent in 2022. This followed a period of record-low rates during the pandemic, when the base rate was slashed to 0.10 percent to support the economy.
By late last year, inflation began to moderate, allowing the BoE to pause rate hikes and implement gradual cuts, with the UK economy expected to grow at a modest pace in 2025.
GDP projections showed growth ranging from 1.2 percent to 1.7 percent. Household consumption and government spending are expected to drive growth, but global trade uncertainties and domestic fiscal challenges could weigh on the outlook. Inflation is forecast to average between 2.3 percent and 2.7 percent, with wage growth and energy costs as key drivers. Meanwhile, the job market remains stable, with unemployment projected at 4.3 percent.
Inflation, though expected to ease, remains above the BoE’s target, limiting the scope for aggressive rate cuts. At the same time, subdued growth and fiscal constraints underscore the need for supportive policies.
Aside from the broader economy these interest rate decisions have macro impacts on households and business.
For households, higher rates increase the cost of variable-rate and tracker mortgages, reducing disposable income. However, savers benefit from better returns, which can encourage saving and support financial resilience. Businesses face higher borrowing costs, which can deter investment and expansion. Lower rates, on the other hand, provide relief but risk fueling inflation.
Looking ahead the Bank is still poised to implement gradual rate cuts this year, with the base rate potentially falling to 3.7 percent by Christmas. This is based on the hope of dampened inflation and other economic challenges. Beyond 2025, rates are projected to stabilise around 3.6 percent to 4 percent by 2027, again, depending on inflation trends and economic growth. BoE Governor Andrew Bailey has emphasised the importance of a cautious approach.