UK interest rates were cut recently, but the Bank of England warns that more cuts may not come as quickly as some hoped. The Bank reduced rates from 5% to 4.75%, as expected, but they’ve made it clear that big changes might be slower from here on out.

Why Did the Bank Cut Rates?

The Bank of England lowered interest rates in response to the recent Budget. The government is spending more on projects and services, which boosts the economy. For example, they’ve raised the cap on bus fares and increased the VAT on private school fees. While these actions support growth, they also have a downside: they might make inflation creep up again.

Inflation is simply how much prices rise over time. Although inflation was below the Bank’s 2% target recently, experts believe it could rise due to these new spending measures. When inflation goes up, our money doesn’t stretch as far, which is why the Bank has to manage interest rates carefully.

Will Rates Drop More Soon?

Bank of England Governor Andrew Bailey shared his thoughts on what’s next. He said rates will “continue to fall gradually,” but he also warned that cuts will be slow. The Bank doesn’t want to cut rates “too quickly or by too much” because they need to keep inflation under control.

Many investors and experts believe that the Bank will likely keep interest rates the same in December, their last meeting of the year. In fact, some think rates might only go down to 3.5% by early 2026, instead of dropping to 3% as was previously hoped.

Why Do Interest Rates Matter?

Interest rates affect nearly everyone, especially people who borrow money. When rates go down, loans become cheaper. This includes mortgages, which are loans people take out to buy homes. There are over a million homeowners on “tracker” and “variable” mortgages in the UK. For them, a rate cut means their monthly payments will decrease a little, but it doesn’t mean payments are low—mortgage rates are still higher than they’ve been for most of the past decade.

However, this rate cut isn’t great news for everyone. People with savings accounts might see their returns drop, as banks generally pay less interest on savings when the Bank of England lowers rates. For savers, the average return on easy-access accounts is now around 3%.

The Budget and Its Impact

The recent Budget was packed with plans. It included a proposal to borrow £28 billion more each year to support new programs and projects. It also included about £40 billion in new taxes, with the largest increase being National Insurance Contributions paid by employers. Many businesses are expected to pass these costs onto customers, which could make prices go up. Plus, this added cost for businesses might mean that wage raises for employees won’t be as generous.

The Budget changes mean that even though rates have dropped a bit, there’s still some uncertainty. More borrowing and higher wages might keep inflation higher than desired, making it difficult for the Bank to continue dropping rates.

What Do Experts Say?

Economists and finance professionals have shared their thoughts on the recent rate cut. Sarah Coles, head of personal finance at Hargreaves Lansdown, says that the Bank of England has cut rates “one more time for the road.” But now, it’s expected that the Bank will pause any further cuts until it sees how things settle.

Coles also pointed out that higher government borrowing, a rise in the national living wage, and increased National Insurance contributions could mean inflation could bounce back, which the Bank is keen to avoid.

Paul Dales, an economist at Capital Economics, noted that the path to lower interest rates is likely to be a slow one. Instead of dropping as low as 3% soon, he predicts they’ll only reach 3.5% in 2026. This is both good and bad news depending on whether you’re borrowing or saving.

How Does This Affect Savers and Borrowers?

With interest rates lower than they were, some borrowers, especially those with variable-rate mortgages, will see lower monthly payments. However, fixed-rate mortgage holders won’t see a difference until their fixed term ends and they need to renegotiate.

On the flip side, the rate cut is likely to hurt savers. Many people like Claire Hopwood and Gavin Laking, who have been building up savings for a new home, say they’re frustrated by how rate cuts impact their savings returns. “We were earning 4.5% on one of our accounts, but that’s now dropped to 3.9%,” Gavin explained.

Claire added that while high interest rates have helped them save for emergencies, every rate drop makes it harder for savers to grow their money.

What Should You Do as a Saver?

If you have savings, it’s a good idea to shop around for better interest rates. Different banks and building societies offer different rates, and sometimes it’s the smaller or newer ones that offer the best deals. Keep in mind that if you can afford to lock your money away for a while, you might find accounts with better returns.

However, not everyone wants to commit their money for long periods. Experts recommend trying to keep some savings for emergencies, even if it’s just a small amount each month. This can help cover unexpected expenses without needing to borrow.

What’s Next for Interest Rates and the Economy?

With inflation remaining a concern, the Bank of England is taking a cautious approach to rate cuts. They want to avoid cutting rates too fast and accidentally triggering higher inflation.

According to the Bank’s updated predictions, inflation may drop to 2% by 2027, a year later than previously forecast. They also raised their growth forecast for 2025, saying the unemployment rate might fall from 4.7% to 4.1%.

For now, borrowers and savers alike are waiting to see if rates will go down any further or if they’ll stay put for a while.