UK Interest Rates 2025

UK interest rates have been at the centre of financial news for the past three years. After more than a decade of historically low rates — including a record low of 0.1% during the pandemic — the Bank of England raised rates aggressively between late 2021 and 2023 to combat surging inflation. As of early 2025, rates are gradually falling again, but remain elevated compared to the pre-2022 era. This guide explains everything you need to know about UK interest rates, how they are set, and what they mean for your finances.

What Is the Bank of England Base Rate?

The Bank of England base rate (also called the "Bank Rate" or informally the "interest rate") is the single most important interest rate in the UK economy. It is the rate at which the Bank of England lends money to commercial banks overnight.

While you cannot borrow at the base rate directly, it acts as a benchmark for virtually every other interest rate in the economy:

• Mortgages — particularly tracker and standard variable rate mortgages
• Savings accounts — banks use the base rate to determine how much to pay savers
• Personal loans and credit cards — interest rates generally follow base rate movements, though with a significant markup
• Business loans — commercial lending rates are priced relative to the base rate
• Government borrowing — gilt yields (government bond interest rates) respond to base rate expectations

Current Rate and Recent History

The Bank of England base rate reached a 15-year high of 5.25% in August 2023, where it remained for over a year. The Bank began cutting rates in August 2024, and by early 2025 the rate stood at 4.75%.

Historical Context: UK Base Rate Over 25 Years

To understand where we are today, it helps to look at the base rate in historical context:

How the MPC Sets Interest Rates

The Bank of England's Monetary Policy Committee (MPC) is responsible for setting the base rate. The MPC consists of nine members:

• The Governor of the Bank of England (chair)
• Three Deputy Governors
• The Chief Economist
• Four external members appointed by the Chancellor

The MPC meets roughly every six weeks (eight times per year). At each meeting, members vote on whether to raise, hold, or cut the base rate. Decisions are made by a simple majority vote, with the Governor having a casting vote in the event of a tie. Minutes and individual voting records are published two weeks after each meeting, along with a Monetary Policy Report (quarterly) containing the Bank's forecasts for inflation and growth.

What the MPC Looks At

When setting rates, the MPC considers a wide range of economic indicators:

• CPI inflation — the primary target is 2% CPI. If inflation is significantly above or below target, rates must respond.
• GDP growth — raising rates too aggressively risks tipping the economy into recession.
• Employment and wages — strong wage growth can feed inflation; weak employment signals economic slowdown.
• Global developments — events such as oil price shocks, geopolitical conflicts, or recessions in major trading partners affect UK inflation and growth.
• Exchange rates — a weaker pound makes imports more expensive, adding to inflation.
• Credit conditions — how easily businesses and households can access credit affects spending and investment.

How Interest Rates Affect Mortgages

For most UK homeowners, the base rate's most direct impact is on their mortgage. The effect depends on the type of mortgage you have:

Tracker Mortgages

Tracker mortgages are directly linked to the base rate, typically set at a fixed percentage above it. For example, "base rate + 1%" means if the base rate is 4.75%, you pay 5.75%. When the base rate moves, your mortgage rate moves immediately (or within a specified period defined in your mortgage terms). Trackers offer transparency but no payment certainty.

Standard Variable Rate (SVR) Mortgages

The SVR is the lender's default rate, usually applied when a fixed deal ends. SVRs are set at the lender's discretion but typically follow base rate movements closely. In 2025, most SVRs are around 7-9% — significantly higher than available fixed rates — making it important to remortgage before your fixed deal expires.

Fixed-Rate Mortgages

Fixed rates protect you from base rate changes during the fixed period (typically 2 or 5 years). However, the rate you are offered on a new fixed deal reflects market expectations of future interest rates, not just the current base rate. In a falling rate environment, shorter fixes or trackers may be advantageous; in a rising rate environment, locking in a long-term fix provides security.

Impact on Monthly Payments

How Interest Rates Affect Savings

High interest rates are good news for savers. When the base rate is elevated, banks compete more aggressively for deposits and offer better savings rates. In 2023-2024, UK savers were able to access easy-access accounts paying 4-5% — the best rates since the early 2000s.

Types of Savings Accounts and Rate Sensitivity

The Inflation and Interest Rate Link

The relationship between interest rates and inflation is central to monetary policy. When the Bank raises rates:

1. Borrowing becomes more expensive — businesses invest less; consumers spend less on credit.
2. Mortgage costs rise — homeowners have less disposable income to spend.
3. Savings returns improve — people save more rather than spend.
4. The pound typically strengthens — making imports cheaper and reducing imported inflation.
5. Overall demand in the economy falls — prices stop rising as fast, reducing inflation.

Conversely, cutting rates stimulates the economy: cheaper borrowing encourages investment and spending, but can push inflation higher if the economy overheats.

UK Inflation History (CPI)

The Wider Economic Impact of Interest Rates

Interest rates affect far more than just mortgages and savings accounts. Here is how rate changes ripple through the broader economy:

Business Investment

Higher borrowing costs make it more expensive for businesses to finance expansion, equipment, or property. This can dampen economic growth and even trigger job losses. Conversely, low rates encourage businesses to invest and hire.

House Prices

There is a well-documented inverse relationship between interest rates and house prices. Higher rates increase the cost of mortgage finance, reducing buyers' purchasing power and suppressing demand. UK house prices fell in real terms during 2023-2024 as rates rose. As rates fall in 2025, the housing market has begun to recover.

The Exchange Rate

Higher UK interest rates attract foreign capital seeking better returns, which increases demand for sterling and typically strengthens the pound. A stronger pound makes exports more expensive and imports cheaper — useful for reducing imported inflation but potentially damaging for UK exporters.

Government Debt Costs

The UK government borrows hundreds of billions of pounds each year. When interest rates are high, the cost of servicing that debt rises. In 2023/24, the UK spent approximately £100 billion on debt interest alone — a historic high driven by elevated rates and inflation-linked debt.

What to Do When Interest Rates Are High or Falling

If Rates Are High (as in 2024-2025)

• Mortgage holders: Review your mortgage type. If you are on an SVR, consider fixing for 2-5 years. If you have overpayment flexibility, overpaying reduces your balance and future interest costs.
• Savers: Take advantage of high rates by moving cash into higher-yielding savings accounts and cash ISAs. Consider locking some money into fixed bonds before rates fall.
• Borrowers: Avoid new unsecured debt where possible. Clear credit card balances as interest charges are very high relative to savings rates.

If Rates Are Falling

• Mortgage holders on trackers: You will benefit automatically from rate cuts. Consider whether to switch to a fix if you want payment certainty.
• Savers: Act quickly to lock in the best fixed rates before they fall. Review easy-access accounts regularly as rates will drift down.
• Investors: Falling rates generally support equity and property valuations. Bonds also tend to perform well when rates fall (bond prices rise as yields fall).

Interest Rate Outlook 2025

As of early 2025, most economists and market forecasters expect the Bank of England to continue cutting rates gradually through 2025 and into 2026, with the base rate potentially reaching 3.75-4.0% by the end of 2025. This is contingent on:

• Inflation remaining at or close to the 2% target
• Wage growth moderating from the elevated levels seen in 2022-2024
• Global economic conditions remaining broadly stable
• No major new shocks (energy price spikes, geopolitical events, etc.)

Frequently Asked Questions