What You Need To Know About The Bank of England’s Base Rate and Inflation
The Bank of England held the base rate at 4.25% in June, so all eyes were on the August meeting to see what decision the Bank would make next. Would the base rate decrease or remain the same?
On August 7, 2025, the Bank of England announced that it had voted to cut the base rate to 4%. This is the lowest the rate has been in two years and could have an impact on people seeking mortgages and other loans, as well as affecting the amount of interest earned on savings. Just a couple of weeks after the base rate change, UK inflation rose to the highest level since January 2024, which is not ideal, as the Bank of England’s base rate is set to keep inflation under control and as close to its 2% target as possible.
In this blog, we’ll take a look at what the base rate drop means, why it’s happened, and what’s going on with inflation. Let’s dive in!
What Is The Base Rate?
The Bank of England’s base rate is the rate it charges lenders to borrow money, allowing them to offer their services to customers. In turn, this can have a knock-on effect on the interest rates that lenders and banks charge borrowers, particularly on tracker mortgages that follow the base rate.
Eight base rate meetings happen each year, and it’s when the Bank of England’s Monetary Policy Committee (MPC) gets together to vote on whether it should be held, raised, or dropped to try and keep inflation close to the 2% target.
Why Did The Bank Vote To Cut The Base Rate In August?
At the August meeting, the MPC voted by a majority of 5-4 to reduce the base rate by 0.25% to 4%*. The vote in favour of dropping the base rate instead of holding it was very narrow, with it taking the MPC two votes to reach a final decision. This suggests that the Bank remains committed to taking a steady and cautious approach to any potential drops.
What About Inflation?
When deciding what to do about the base rate, the MPC carefully considers inflation, which needs to be kept as close as possible to the 2% target. On August 20, 2025, figures from the Office for National Statistics (ONS) showed that inflation rose to 3.8% in the year to July, making it the highest since January 2024**. It’s thought that this increase is due to a rise in spending on holidays and the Oasis effect. According to predictions by the Bank of England, inflation will continue to rise in September before starting to fall back towards the desired target.
How Are The Base Rate and Inflation Connected?
The base rate is the Bank of England’s main way of trying to control inflation. Putting it up or holding it makes borrowing more expensive and spending slower, which helps bring down inflation. Similarly, reducing it can make borrowing cheaper and encourage spending, which can lead to an increase in inflation. Due to this, the base rate is reviewed eight times per year to try to keep inflation close to the Bank’s 2% goal.
What Does The Base Rate Drop Mean If I’m Buying A House?
Every time the Bank of England’s MPC meets, there’s an onslaught of headlines speculating what any changes to the base rate might mean for borrowers. The truth is that while the base rate does have some influence on mortgage rates, it’s only one factor out of many that can have an impact. If you are on a fixed-rate mortgage deal, the amount you pay back each month won’t change while you’re in your fixed period. If you’re on a tracker rate mortgage, you may see a decrease in the amount you pay.
However, if you are looking to buy a house or secure a mortgage deal, other factors, such as the global economy, inflation, property demand, and the swap rate (the amount lenders pay to borrow money to provide services), have a greater influence on the cost of a mortgage.
You might wonder if you should postpone the home-buying process to see if better rates become available, but if you find the house that’s perfect for you, you don’t want to risk missing out. Lenders consider the big picture of how much you earn, what your committed monthly spending looks like, and any debt you may have, when deciding whether to approve you for a mortgage. It can take months for the house-buying process to complete, and you can always get moved to a lower rate if one becomes available.
Our Predictions For The Next Base Rate Meeting
While the decision to drop the base rate can be seen as a step in the right direction for borrowers, it will likely impact mortgage deals in the future. However, it’s impossible to predict what will happen next with the base rate. With inflation on the rise, it is likely that the MPC will vote to hold the base rate at the next meeting, with any further decreases only occurring when inflation has dropped. For now, we’ll just have to wait and see. In the meantime, our professional team is here to help you with all things mortgages, so don’t hesitate to get in touch.
*https://www.bankofengland.co.uk/monetary-policy-summary-and-minutes/2025/august-2025
**https://www.bbc.co.uk/news/live/cp895dyj046t
