The Bank of England’s recent cuts to the base rate, most recently a reduction to , from 4% to 3.75%, are rippling through the UK economy, impacting mortgage holders, savers, and the broader financial landscape. While the cuts are seen as a signal that the peak of inflation has passed – with expectations it will hit 2% by April – the effects are nuanced and unevenly distributed.
Mortgage Market Adjustments
Approximately one-third of UK households have a mortgage, with around one million on tracker or variable rate deals. These homeowners are already experiencing, or will soon experience, a reduction in their monthly payments. For those on tracker mortgages, rates will fall by 0.25 percentage points. Those with standard variable rate (SVR) mortgages could see a similar reduction, though lenders have discretion in how quickly and fully they pass on the cut. UK Finance estimates that tracker mortgage holders will save around £29 per month, while those on SVRs could save approximately £14, based on an average balance of £66,500.
The majority of mortgage customers, however, have fixed-rate deals. These borrowers won’t see an immediate change in their monthly payments. However, the cuts are influencing the rates available on new fixed-rate mortgages. While rates had been falling at the start of the year due to lender competition, broader pressures on lenders are now potentially stalling further declines. The cheapest two-year fixed deal currently available is 3.79% from Lloyds (for Club Lloyds customers), and Halifax offers 3.87% for remortgages – both significantly lower than the rates of 4.22% seen in December. Around 1.21 million fixed-rate deals are set to expire in 2026, meaning a significant number of homeowners will be re-entering the market and facing the new rate environment.
Impact on Savings Rates
The cuts to the base rate are less welcome news for savers. Financial information service Moneyfacts reports a “slaughter of savings rates,” with over two-thirds (70%) of savings providers having already cut their rates since the beginning of the year. Variable rate savings accounts, particularly easy-access accounts, are likely to see reductions of 0.25% within two to four weeks. Fixed-rate savings have already factored in some of the anticipated cuts, and may see further, albeit smaller, reductions. Rachel Springall of Moneyfacts warns that real returns on cash savings are weak given that inflation remains above target, potentially leading to “a dangerous attitude of apathy” among savers.
The average savings rate is currently 3.5%, 0.42% lower than the same time last year. The average easy access ISA rate has also fallen, decreasing by 0.46% over the past year.
Broader Economic Context and Future Outlook
The Bank of England’s decision to cut the base rate reflects a broader assessment of the economic climate, including easing inflation and global economic uncertainty. The Monetary Policy Committee (MPC) voted narrowly for the cut, with five members in favour, two wanting no change, and two favouring a steeper cut to 4%. The MPC meets eight times a year and publishes its quarterly Monetary Policy Report after each meeting, providing detailed economic analysis and projections that underpin its decisions.
Martin Lewis, founder of MoneySavingExpert.com, noted that the cut to 3.75% is the lowest base rate in nearly two years, and suggests that further rate cuts are likely throughout 2026. However, the pace of future cuts remains uncertain, dependent on economic data and the evolving inflationary landscape.
Limited Impact on Credit Cards and Loans
The impact on credit cards is expected to be minimal. Credit card APRs are already high, typically around 24.9%, and are significantly above the base rate. While the cuts may lead to slightly longer 0% introductory offers, a substantial reduction in credit card interest rates is unlikely. Existing loans, typically fixed-rate, are also unaffected. New loan rates are more influenced by interest rate forecasts than by immediate base rate movements.
The Bank of England’s base rate is the rate at which it charges other banks and lenders when they borrow money, and serves as a key tool in managing inflation and stimulating economic growth. The recent cuts, while providing some relief to borrowers, also present challenges for savers and highlight the complex interplay of factors shaping the UK’s financial environment.
