The Bank of England is expected to hold its policy interest rate steady at 4.25% at its next monetary policy meeting. This decision follows unprecedented economic instability. That has become very difficult as recently the UK economy has gone into reverse and inflationary pressures are still proving to be stubborn.
The Bank of England’s interest rate has taken quite the rollercoaster ride since the beginning of 2020. A few days into January 2020, the rate was still 0.75%. In March 2020, the Covid pandemic really started to take hold. Consequently, the Federal Open Market Committee (FOMC) lowered that rate significantly to an unprecedented 0.1%. This floor held until late 2021, a time of historic monetary dovishness.
Once the economy began to pick up, the Bank of England had to act. They raised interest rates slowly, to a peak of 5.25% in August 2023. There were multiple steps where rates were downwardly adjusted. They decrease to 5% in Aug 2024, then down to 4.75% in Nov 2024, then down to 4.5% in Feb 2025. The latest reduction to 4.25% was implemented on May 8, 2025.
Yet this interest rate environment has had serious and adverse implications on borrowers and savers. The average rate for a two-year fixed mortgage just clustered above 5.12%. Simultaneously, the average rate for a five-year fixed mortgage was a little lower, at 5.10%. Borrowers are already starting to feel the squeeze, with higher interest rates resulting in larger payments on renewal of fixed-rate agreements. Currently, more than 80 percent of consumers are trapped in these contracts.
Savers have enjoyed better returns due to high interest rates. The UK economy has begun to crack under the pressure, having contracted by 0.3% on the month in April 2025, an outcome that was completely unexpected. Even with better rates available for savers, this shrinking trend points to some real challenges that persist.
Economic headwinds might be formidable, but inflation is persistently resilient, hovering around 3.4% as of May 2025. It represents the highest positive growth rate we’ve witnessed in more than a year. According to Bloomberg’s economists, inflation will probably stay over 3% all year. They credit this about-face to continued robust wage growth and inflationary pressure from the fiscal stimulus of new government spending.
Economist Monica George Michail raised the concern that outside forces could unduly influence the Bank’s decisions.
“We forecast inflation to remain above 3% for the remainder of the year amidst persistent wage growth and the inflationary effects from higher government spending.” – Monica George Michail
Furthermore, Michail made remarks about the geopolitical situation and how that might affect economic prospects.
“Additionally, the current tensions in the Middle East are causing greater economic uncertainty. We therefore expect the Bank of England to keep rates on hold this Thursday and implement just one further cut this year.” – Monica George Michail
