BBC Business reporter
Interest rates are expected to be cut by the Bank of England later, in a move closely watched by households and economists.
Analysts predict the benchmark rate will be cut from 4.75% to 4.5%, as the Bank comes under pressures to boost the UK economy which has been showing slow growth.
The Bank rate is the primary tool aimed at controlling inflation, and hopes of a cut rose after the inflation rate – which charts the rising cost of living – fell to 2.5% in the year to December.
However, it remains above the Bank’s target of 2%, and changes in the Budget are forecast to push it up.
Economic uncertainty has been heightened, owing to US President Donald Trump’s introduction, or threat, of import tariffs. They could lead to inflationary pressure globally, causing a knock-on effect on price rises in the UK.
Why do interest rates change?
The Bank moves rates up and down to try to control inflation, which measures the pace of overall price rises.
By raising rates, borrowing is made more expensive, so people have less money to spend. People may also be encouraged to save more.
In turn, this reduces demand for goods and slows the rate at which prices are rising.
But it is a balancing act – increasing borrowing costs risks harming the economy as it discourages businesses from investing and creating more jobs.
Once price rises are more under control, then the Bank will consider lowering interest rates.
Its base interest rate heavily influences the rates High Street banks and other money lenders charge customers for loans, credit cards and other finance deals.
This is most obviously seen in the cost of mortgages. Reducing the base rate would see an immediate impact for those on “tracker” mortgages.
About 629,000 mortgage-holders have tracker deals. Typically, their monthly repayment would fall by about £29 as a result of the expected 0.25 percentage point cut later.
A similar number of householders have variable rate deals, and lenders will be under pressure to cut their rates if the Bank reduces the base rate.
Fixed rate deals do not change immediately, but the expectation of further rate cuts could lead to new, or renewing, borrowers getting a better deal.
Savers would be hit by a base rate fall, as the return they receive from banks would also be likely to be cut.
‘Gradual approach’
In December, when rates were held at 4.75%, the Bank’s Governor, Andrew Bailey, said it would take a “gradual approach to future interest rate cuts”.
But he added: “We can’t commit to when or by how much we will cut rates in the coming year.”
In the minutes from that meeting, the Bank said there was uncertainty “around how the measures that had been announced in the autumn Budget were affecting growth”.
Following November’s meeting, Mr Bailey would not be drawn on the impact of Trump tariffs on the UK economy, saying “let’s wait and see”.
In the US, the central bank – the Federal Reserve – has indicated it will cut rates at a slower pace this year.
When the Bank announces its interest rates decision at 12:00 it will also share a report on where it sees inflation going in the coming months and could hint at its strategy in response.
Cutting the UK interest rate would strike a balance between “supporting an economy that appears to have ground to a complete halt and preventing inflation from taking off again”, economist Paul Dales from Capital Economics told the BBC.
“Trump’s tariffs are unlikely to influence UK interest rates much,” he added, but wage growth being faster than the Bank’s forecast could influence its decision.
The UK economy grew by less than expected in November, after not growing at all in the previous two months. A further slowdown is expected as businesses brace for rising costs from April because of budgetary changes like rising National Insurance contributions and higher minimum wages.
The economic figures came after recent turbulence in financial markets sent the government’s borrowing costs to the highest level for several years and the value of the pound down.