The Bank of England has today reduced interest rates to 3.75%
The Bank of England has today announced a welcome Christmas present for Britains borrowers with a 0.25% reduction in the base rate, reducing it from 4% down to 3.75%.
This decision has been widely anticipated in the run up to the final meeting of 2025, particularly after more encouraging inflation data and a growing sense that economic momentum has weakened. It is another step in the gradual process we have seen this year, with the Bank trying to ease pressure on households and businesses while keeping inflation moving towards its 2% target.
So, what has brought the Bank to this point?
Inflation has finally begun to ease recent months, and there have been signs that price pressures are cooling across a range of everyday costs, even if the overall picture remains uncomfortable for many households. At the same time, growth has been sluggish and there are signs the labour market is less tight than it was.
It is also difficult to ignore the political context. With the Autumn Budget now absorbed and the debate around taxes and business costs still very live, the Bank has had more room to act without appearing to move into the unknown. However, it will be at pains to stress that this is still a cautious step, not a green light for rapid cuts from here.
What does it mean for housing?
For the housing market, a base rate cut is generally supportive, but the impact tends to filter through gradually.
Homeowners on tracker and variable rate mortgages will usually feel the change first, with slightly lower monthly repayments. Fixed rate mortgages are still on the high side which then acts as a disincentive for many.
For buyers, any easing in borrowing costs helps at the margins. It can improve affordability calculations and give some households the confidence to proceed. For sellers, the uncertainty and fears of a lack of interest have created a huge issue in terms of available stock throughout 2025.
Our thoughts going forward
Today’s cut is meaningful, but it is also measured. The Bank has made it clear throughout 2025 that it wants to see sustained progress, not just one or two encouraging data points.
However, it must not be forgotten that the reduction in interest rates is well behind the target the Bank of England set itself and subsequently the economy has been light on stimulus.
As far as the housing market is concerned it is hoped that further reductions during the course of 2026 will bring more stability, and subsequently more stock, to the market.
In order to facilitate this, the key question will be whether inflation, services inflation and wage growth continue to cool. If they do, further reductions are possible. If they do not, the Bank may pause again.
