The fall in inflation suggests the Bank of England would be likely to cut interest rates if it were big enough, analysts said. Since January 2021, the Bank’s interest rate has moved dramatically, from a historic low of 0.1%. The rate then shot up to a new apex of 5.25% in August 2023 following a historic cycle of hikes beginning in late 2021. In September, it was modestly reduced to 5%.
This was announced through three consecutive rate cuts in November 2024, when the Bank lowered the policy rate to 4.75%. That trend persisted, as it fell to 4.5% on February 6, 2025. Just three months later, on May 8, 2025, it dropped even lower to 4.25%. Most recently, on 7 August 2025, the rate hit 4%. Analysts have pushed up expectations for a first cut to 3.75% as inflation continues to fall sharply.
The Monetary Policy Committee (MPC) only has nine members. We hope they engage more substantively with these changes in their next round of meetings. Analysts predict a split between committee members over keeping the interest rates high. They’re not expecting an agreement on what the best way forward would be.
James Smith, developed markets economist at ING, noted that inflation has fame down significantly in the past few months. This positive trend makes a rate cut more likely.
“The latest drop in inflation fits into a broader body of evidence suggesting that price pressures are cooling.” – James Smith
Even a small reduction of 0.25 percentage points would amount to billions of dollars in additional costs for homeowners. If your mortgage is pegged to the Bank of England’s base rate, you stand to gain from a cut. Approximately 500,000 people would experience a decrease in average monthly payments of £29. In much the same way, homeowners on standard variable rates would experience a consistent drop in payments of about £14 per month on average.
4.82% The interest rate for a new, or existing, average two-year fixed residential mortgage on December 17, 2023. The average five-year fixed residential mortgage rate was just higher, at 4.90%. These figures underscore a shift to the growing mortgage landscape, potential rate cuts appear on the horizon.
