The Bank of England has announced that it will reduce the Base Rate by 0.25%, taking it to 4.5%, in the first decision of the year. Base Rate was held at 4.75% in December after two cuts in 2024.

The Bank meets every six weeks to decide what should happen to interest rates, with the aim of keeping inflation to its target and keeping the wider economy healthy. It was announced that inflation was at 2.5% in the year to December, which is still above the 2% target the government sets for the Bank.

The financial markets have been widely predicting a cut to interest rates this week, as continuing to hold rates could have a negative knock-on effect on economic growth, impacting businesses and households further down the line.

What’s happened to mortgage rates recently?

There has been marginal increases in mortgage rates in recent weeks, despite some lenders cutting rates across mortgage products. However, in the past week, the average rate for a 2-year fixed rate mortgage has fallen by 0.02% to 5% compared to a week ago, while the average rate 5-year fixed rate is now 4.79%.

What do the experts think?

Our mortgage expert, Matt Smith, says: “The Bank of England (BoE) has kick-started 2025 with the first Base Rate cut of the year. The decision follows a weekend of unsettling news of tariff announcements from across the Atlantic, which will lead to caution from the Bank while it takes time to assess possible impacts. However, today’s cuts were still widely anticipated as the BoE takes slow and steady steps towards driving growth, amid sluggish inflation remaining above the 2% target since November.

“At the end of last year, the financial markets were forecasting four Base Rate cuts during 2025, but inflationary pressures have watered this down to two, or potentially three rate cuts of 0.25%, which could still see us closing out the year with Base Rate lowered to 4%, or further.”

With the early promising signs of home-mover activity we’ve been seeing since the start of this year, the outlook for borrowers remains stable.

Matt says: “While we’ve seen some mortgage rates rise in recent weeks, these have been mostly in the higher and lower loan-to-value ranges, and average mortgage rates are still below where they were when they spiked in January.

“Some of the major lenders have cut rates in recent days, and if the Base Rate continues to follow the expected downward trajectory in 2025, there will be some headroom for lenders to continue to slowly reduce their pricing. The UK mortgage market remains competitive, but headline rates will continue to be impacted by events both in the UK and overseas,” he adds.