Interest Rates Just Fell – But Don't Get Your Hopes Up About The Economy Just Yet

Andrew Bailey, Governor of the Bank of England, announced that interest rates were changing from 4.25% to 4%.It’s been a long time since it felt like the British economy was in a good place.Covid, followed by the cost of living crisis and then the Labour government’s repeated warnings about how there was no money left means life in the UK has ended up feeling a little... glum.So the Bank of England’s decision to cut interest rates – the cost of borrowing – from 4.25% to 4% today seems like cause for optimism.Interest rates are used as a lever by the Bank to keep inflation, which is the rate at which prices change over 12 months, close to the government’s target rate of 2%.The current inflation rate is at 3.6%, which is still above its goal rate, because the Bank decided there has been “substantial disinflation over the past two and a half years”.Chancellor Rachel Reeves said she “welcomed” the news, especially as interest rates have come down five times since Labour were elected last July.She said this was due “in part to the stability that we’ve managed to return to the economy” after the difficulties of the Tory government.But, if it seems like no one else is celebrating just yet, it’s for good reason.The Bank of England has cut interest rates for the fifth time in a year to 4%.Chancellor Rachel Reeves says she welcomes the decision, adding that the government has brought "stability" to the economy.Latest ➡️ https://t.co/rTYDOlHnUt📺 Sky 501, Virgin 602 and YouTube pic.twitter.com/7cMbX15YbX— Sky News (@SkyNews) August 7, 2025The base interest rate is decided by the Bank’s nine-person Monetary Policy Committee (MPC) – and they were split over just how what to do with the interest rate.Initially, one committee member wanted to decrease it by half a percentage point. Four members wanted to cut the 4.25% rate by a quarter of a percentage point, while the remaining four others wanted no changed at all.The Bank had to vote twice for the first time in its history to reach its decision, and eventually five people backed the decision to cut by a quarter of a percentage point.The specialists said while there is now clarity around the impact of Donald Trump’s tariffs – as the UK secured a trade deal – the overall economy is still stagnant and unemployment is rising after the increase in National Insurance contributions for employers began to impact the jobs’ market.One MPC member even said he feared a recession, although the Bank of England governor Andrew Bailey said they did not spend much time discussing that possibility.So why did the Bank take down interest rates?It seems the decision was not out of a belief that the economy would pick up but out of further inflation fears.The Bank’s economists think food prices could increase to 5.5% inflation.That could drag the overall inflation rate higher, the Bank warned, because groceries can “have an outsized influence on households’ formation of inflation expectations.”This could trigger people to request higher salaries – and then force inflation to go up again.Labour’s political rivals were quick to dash Reeves’ response to the interest rate update, too.The Liberal Democrats’ Daisy Cooper said: “This could be welcome news for households who have been hammered by sky-high mortgage rates, but let’s not fool ourselves – this would have happened months ago if the government was not acting as a roadblock to growth. “The mess the Conservatives left cannot be overstated, but Labour is failing to clean it up with their growth-crushing jobs tax and refusal to cut the reams of red tape holding back our exporters.“Countless people will still be worried about keeping a roof over their head and putting food on the table until the government get serious about growth, and is more ambitious on the cost of living crisis by taking on our proposals to cut energy bills in half.”The Tory shadow chancellor, Mel Stride, also hit out over the news, saying: “Rachel Reeves claims credit for interest rate cuts – but rates are coming down to support the weak economy she has created. Inflation has almost doubled on her watch and unemployment is rising.“Interest rates should be falling faster, but Labour’s Jobs Tax and reckless borrowing have pushed inflation well above target. “With economists warning Labour have created a £50 billion black hole and the chancellor refusing to rule out further harmful tax rises, Labour are showing they don’t understand the economy.”Meanwhile, the chair of UKHospitality, Kate Nicholls, noted that the “hard truth” is a decline in interest rates is not enough “to unlock the growth” needed. ″Banks must prioritise growth by ensuring businesses can access affordable finance, especially in hospitality, which continues to face mounting cost pressures,” she said, calling for lower business rates, a cut to VAT, and an NIC exemption to young people.Nicholls warned: “Without these measures, businesses risk being taxed out of existence.”Related...Rachel Reeves Gets Brutal Reality Check Just Hours After Claiming Labour Is Making 'Progress' On The EconomyBlow For Rachel Reeves As UK Economy Shrank By 0.3% After Trump TariffsDonald Trump's Tariffs Blamed As Experts Make Grim Forecast About UK Economy

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