Bank of England expected to cut interest rates

The Bank of England is expected to announce an interest rate cut later today, a move being closely watched by households and economists alike. Analysts predict that the base rate will be lowered from 4.75% to 4.5%, as the Bank of England faces pressure to boost the UK economy, which has been experiencing sluggish growth. This potential rate cut aims to stimulate economic activity and encourage investment.

Bank interest rates are a primary tool for controlling inflation. This follows a drop in the rate of inflation, which measures the increase in the cost of living, to 2.5% in the year to December, raising expectations of a rate cut. However, the inflation rate remains above the Bank of England's 2% target, and budgetary adjustments are expected to push inflation higher. Therefore, the Bank of England must carefully consider the potential inflationary impact before proceeding with a rate cut.

Economic uncertainty has been heightened by US President Donald Trump's introduction or threat of import tariffs. These tariffs could lead to global inflationary pressures, which in turn could have a knock-on effect on price rises in the UK. The potential for increased import costs could further complicate the Bank of England's efforts to manage inflation and support economic growth.

The Bank of England controls inflation, which measures the rate at which overall prices rise, by raising or lowering interest rates. Increasing interest rates raises the cost of borrowing, thereby reducing people's disposable income, while also potentially encouraging people to save more. In turn, this reduces demand for goods and slows the rate at which prices rise. However, it is a balancing act – raising the cost of borrowing can damage the economy, as it deters business investment and the creation of more jobs. Once price rises are better under control, the Bank of England will consider lowering interest rates.

The Bank of England's base rate heavily influences the interest rates that commercial banks and other lenders charge customers on loans, credit cards, and other financing deals. This is most evident in mortgage costs. A cut in the base rate will have a direct impact on those with "tracker" mortgages. Around 629,000 mortgage holders have tracker loans. Typically, their monthly repayments will fall by around £29, due to the expected 0.25 percentage point cut later today. A similar number of households have variable-rate loans, and lenders will face pressure to reduce rates if the Bank of England cuts the base rate. Fixed-rate loans will not change immediately, but expectations of further rate cuts may lead to better deals for new or remortgaging borrowers. Savers will be affected by a fall in the base rate, as the returns they get from banks are also likely to fall.

Bank of England Governor Andrew Bailey said when interest rates were held at 4.75% in December that there would be "a series of gradual steps of future rate cuts". But he added: "We can't promise when or by how much we will cut interest rates in the coming year." In the minutes of the last meeting, the Bank of England said that "there was uncertainty about the impact on growth from the measures announced in the Autumn Statement". Following the November meeting, Mr Bailey declined to comment on the impact of Trump's tariffs on the UK economy, saying "let's wait and see". In the US, the central bank – the Federal Reserve – has already indicated that it will cut interest rates at a slower pace this year.

The Bank of England will announce its interest rate decision at 12:00, while also sharing a report on where it thinks inflation is heading in the coming months, and potentially hint at its strategy for dealing with it. Paul Dales, an economist at Capital Economics, told the BBC that lowering UK interest rates would be a "trade-off between supporting an economy that seems to have stalled completely and preventing inflation from picking up again". He also added that "Trump's tariffs are unlikely to have much of an impact on UK interest rates", but faster wage growth than the Bank of England is forecasting could influence its decision. After stalling in the previous two months, the UK economy grew less than expected in November. The economy is expected to slow further as businesses prepare for cost increases from April's budget adjustments, such as increased National Insurance contributions and a higher minimum wage.

Ahead of the release of these economic figures, financial markets have experienced recent turbulence, causing government borrowing costs to rise to their highest levels in years, and the pound to weaken.