After a couple of weeks of speculation, the Bank of England (BoE) has done as many experts predicted and reduced the base rate, cutting it 0.25 percentage points from 4.25% to 4%.

This marks the third cut of 2025, and the fifth within the last 12 months, taking the base rate to a two-year low.

As reported by the BBC, it was a knife-edge vote to make the cut, with the BoE’s Monetary Policy Committee (MPC) voting 5-4 after an unprecedented second vote in a single meeting¹. According to Bank governor Andrew Bailey, that demonstrated just how finely balanced this decision was².

The base rate is a key financial mechanism that affects the entire economy, so while 0.25 percentage points may not sound like much, this change could affect key areas of your wealth, including your savings, mortgage, and investments.

So, read on to see why the BoE has made this decision, and what it might mean for you and your wealth.

The base rate is one of the most important tools for controlling inflation and growth

First, it’s useful to understand what the base rate is, and how it works.

The base rate is the interest rate that the BoE charges other financial institutions when lending money to them. In turn, this dictates interest rates across the UK economy.

Crucially, the base rate is one of the most important tools the BoE has for controlling inflation and driving economic growth.

Inflation is simply the measure of the increase in prices of goods and services over time. A bit of inflation is a good thing, ensuring the economy continues to grow. That’s why the BoE has an annual inflation target of 2%, which it tries to maintain using the base rate.

When inflation is too high, the BoE can raise the base rate, prompting interest rates across the economy to rise with it. This makes borrowing more expensive and saving more attractive, aiming to reduce consumer spending and slow the increase in prices.

By contrast, when inflation is lower than the target, the BoE can reduce the base rate, leading to other financial institutions following suit. The goal here is to stimulate spending and growth by making borrowing cheaper, encouraging individuals to take out loans and mortgages, while also making saving less attractive.

It’s worth noting that when inflation is lower, it doesn’t mean prices are falling. It means they are simply increasing more slowly. When inflation falls below 0% and prices start falling, this is called “deflation”.

A need for economic growth has led the Bank to cut the base rate

Today’s announcement that the BoE has reduced rates to 4% has been slightly controversial, because it’s been made in spite of the fact that inflation remains above the annual target. This is in part what made the MPC vote so close.

Data from the Office for National Statistics shows that, as measured by the Consumer Prices Index – a list of commonly purchased consumer items in the UK – inflation has remained above the BoE’s 2% target in every month of 2025 so far³.

As the Bank explained in its base rate report, it expects inflation to rise again this year, to 4% by September⁴. But it’s also satisfied with the progress already made in reducing inflation, and expects it to start falling back towards the target after that high.

So, the Bank has instead focused on the need to stimulate economic growth. As the Guardian notes, there are growing concerns around the state of the UK economy⁵. CNBC also reported that the job market slowed in May, as did Gross Domestic Product, contracting by 0.1% month-on-month⁶.

As the BBC explains, although the economy is predicted to pick up, the Bank wants to encourage savers to spend the money they’ve been holding back, with consumer confidence languishing ⁷.

With this in mind, the decision to cut the rate is one targeted at growth, rather than slowing inflation.

It remains to be seen what will happen for the rest of this year

The next MPC meeting will take place on 18 September, when the Bank will review the base rate decision, and how inflation and the economy have moved since.

But, with the decision so carefully poised this time round, it’s no surprise that commentators are predicting a “decent chance” that rates will not fall again this year⁸.

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¹ 07.08.2025 Bank of England cuts interest rates to 4% BBC² 07.08.2025 Bank of England cuts interest rates as it warns food costs could push inflation to 4% The Guardian³ 16.07.2025 Consumer price inflation, UK: June 2025 Office for National Statistics⁴ 07.08.2025 Monetary Policy Report – August 2025 Bank of England⁵ 07.08.2025 Bank of England cuts interest rates as it warns food costs could push inflation to 4% The Guardian⁶ 07.08.2025 Bank of England narrowly votes to cut interest rates to 4% as balancing act continues CNBC⁷ 07.08.2025 Bank of England cuts interest rates to 4% BBC⁸ 07.08.2025 Bank of England cuts rates to two-year low amid sluggish growth The Telegraph