What are interest rates and will they fall further?
- Published
The Bank of England cut interest rates to 4% in August, taking the cost of borrowing to the lowest level for more than two years.
It was the fifth cut in a year, but was only agreed after an unprecedented second vote by the Bank's policymakers.
Interest rates affect mortgage, credit card and savings rates for millions of people.
What are interest rates and why do they change?
An interest rate tells you how much it costs to borrow money, or the reward for saving it.
The Bank of England's base rate is what it charges other banks and building societies to borrow money.
That influences what they charge their own customers for loans such as mortgages as well as the interest rate they pay on savings.
The Bank moves rates up and down in order to keep UK inflation - which is the measures the pace at which prices are rising - at 2%.
When inflation is above that target, the Bank can decide to put rates up. The idea is that this encourages people to spend less, reducing demand for goods and services and limiting price rises.
However, in recent months inflation has remained above the Bank's target at the same time as the economy has remained relatively flat and the jobs market has softened.
Therefore, the Bank has chosen to cut rates, despite high inflation, in an attempt to encourage people to spend more and get businesses to invest and create jobs to boost the economy.
What has happened to UK interest rates?
The Bank of England's base rate reached a recent high of 5.25% in 2023, but five cuts since August 2024 have brought it down to 4%.
After the latest cut, Bank of England governor Andrew Bailey said that although rates remained on a downward path, future cuts would be made gradually and carefully.
What has happened to UK inflation?
The main inflation measure, CPI, was 3.8% in the 12 months to July 2025, up from 3.6% the previous month.
The increase was driven mainly by higher food prices and a jump in the price of air fares coinciding with the school summer holidays
Although that is far below the peak of 11.1% reached in October 2022, it remains significantly higher than the Bank's target of 2%.
Will UK interest rates fall further?
In August, the Bank's nine-member committee voted 5-4 to cut rates by a quarter percentage point. It followed a never-before-seen second vote, as one economist had argued for a larger cut of half a percentage point.
This suggests future interest rate decisions could also be finely balanced amid concerns that inflation could spike as businesses increase food prices to pay for higher employment costs.
Inflation is now expected to peak at 4% in September, the Bank said in its latest Monetary Policy Report. That is twice the Bank's target rate and above the 3.8% spike it predicted in its previous report in May.
A further rate cut had been expected in November, but analysts are now less sure this will happen given the closeness of the August vote.
Earlier in July, Mr Bailey said the Bank was prepared to make larger interest rate cuts if the job market showed signs of slowing down. Recent figures show that the number of people on payrolls is falling, vacancies are lower and the jobless rate has ticked higher.
Meanwhile, annual growth in average regular earnings, excluding bonuses, remained at 5% between April and June.
The Bank also has to consider the wider global economy. Mr Bailey has repeatedly warned about the unpredictable impact of US tariffs, and conflict in Israel and Iran has also created uncertainty.
How do interest rates affect mortgages, loans and savings rates?
Mortgages
Just under a third of households have a mortgage, according to the government's English Housing Survey, external.
About 600,000 homeowners have a mortgage that "tracks" the Bank of England's rate.
But the vast majority of mortgage customers have fixed-rate deals. While their monthly payments aren't immediately affected by a rate change, future deals are.
Mortgage rates are still much higher than they have been for much of the past decade.
As of 20 August, the average two-year fixed mortgage rate was 4.98%, according to financial information company Moneyfacts, and a five-year deal was 5%. The average two-year tracker was 4.67%.
This means many homebuyers and those remortgaging are having to pay a lot more than if they had borrowed the same amount a few years ago.
About 800,000 fixed-rate mortgages with an interest rate of 3% or below are expected to expire every year, on average, until the end of 2027. Borrowing costs for customers coming off those deals are expected to rise sharply.
You can see how your mortgage may be affected by future interest rate changes by using our calculator:
Credit cards and loans
Bank of England interest rates also influence the amount charged on credit cards, bank loans and car loans.
Lenders can decide to reduce their own interest rates if Bank cuts make borrowing costs cheaper.
However, this tends to happen very slowly.
Savings
The Bank base rate also affects how much savers earn on their money.
A falling base rate is likely to mean a reduction in the returns offered to savers by banks and building societies.
The current average rate for an easy access savings account is 2.64%, according to Moneyfacts.
Any further cut in rates could particularly affect those who rely on the interest from their savings to top up their income.
What is happening to interest rates in other countries?
In recent years, the UK has had one of the highest interest rates in the G7 - the group representing the world's seven largest so-called "advanced" economies.
In June 2024, the European Central Bank (ECB) started to cut its main interest rate for the eurozone from an all-time high of 4%.
At its meeting in June 2025 the ECB cut rates by 0.25 percentage points to 2% where they have remained.
In the US, the central bank - the Federal Reserve - cut rates three times in the latter part of 2024.
However the Fed has since held interest rates - most recently on 30 July. This means the bank's key lending rate's target range remains at 4.25% to 4.5%.
The Fed has repeatedly come under attack from President Trump, who wants to see further cuts.