In its final decision for 2025 the Bank of England has delivered a pre-Christmas interest rate cut from 4% to 3.75%. The last time rates were below 4% was all the way back in January 2023.
At that time, inflation was in double digits whereas today, despite still being above the Bank’s 2% target, inflation is at 3.2%. This reading, for November 2025, having come in below forecasts.
The decision seems to have been a closer run thing than many had been anticipating with five members of the nine-strong Monetary Policy Committee voting for a cut and four voting to keep rates on hold.
The split nature of the Bank’s latest decision may have muddied the waters somewhat on the outlook for interest rates in the year ahead.
What does it mean for savings?
Despite interest rates being cut to 3.75% there are still easy-access savings accounts available with rates above 4%. It usually takes a few weeks for an interest rate cut to filter down into savings rates. There are also fixed rate accounts available offering 4% or more. Much of the savings markets will have already factored in today’s cut to interest rates, but they may come down further.
An increasing number of us are paying tax on our cash savings, meaning it’s worth considering a cash ISA if you have allowance left. A freedom of information request by AJ Bell revealed that 2.64 million people will be hit by tax on their savings in the current tax year. There are still several Cash ISA accounts offering rates above 4% available, which can help savers shield their interest from HMRC. You can check out comparison websites to find the best rate, or use a cash savings hub to access different accounts all in one place.
What does it mean for mortgages?
Clearly, if you are on a fixed-rate mortgage you will have to wait until that expires to see any benefit from lower rates. Those on a variable rate mortgage should see their rate come down in the coming weeks but by how much and how rapidly will depend on the mortgage provider and type of mortgage. Anyone on a tracker should benefit from the interest rate cut more or less immediately.
For someone with £125,000 of mortgage borrowing (with a 25-year repayment term), the 0.25 percentage point cut means an £18 a month saving on their bill, while for those with £400,000 of mortgage borrowing a 0.25 percentage point cut means a £58 monthly saving – or almost £700 a year.
While mortgage rates are linked to the base rate, they aren’t directly based on them. Instead, they are reliant on swap rates, which track government bond or gilt yields.
These went up in the wake of the Bank’s latest decision, with the two-year gilt yield a little above the base rate and the 10-year yield stubbornly above 4.5%. This will have an impact on those looking to fix their mortgage for longer periods.
What is the outlook for rates and inflation?
The markets are currently pricing in one more UK interest rate cut for 2026, although bets on a second did increase after November’s positive inflation surprise.
Inflation is now expected to fall back closer to the 2% target in the spring of next year, which would be a real boost to consumers. The Bank reckons this is largely down to the energy price measures included in Rachel Reeves’ recent Budget.
Even though the effects of the Budget are disinflationary in the short term, they are expected to push inflation up a touch in 2027 and 2028.
The Bank says any further interest rate cuts will still be gradual, allowing it to assess incoming data, noting we are now getting nearer to the estimated neutral rate, which limits the scope for further interest rate cuts.
Tom Sieber: Content editor
Tom Sieber is AJ Bell's Content Editor. He was previously the Editor of Shares Magazine. He has been with the business since 2012.
Tom is a regular contributor to the AJ Bell Money & Markets...
