Bank of England cuts base rate to 3.75% before Christmas

How might this affect people’s finances heading into 2026?

Anyone resolved to save more in 2026 should prepare themselves for lower interest rates after the Bank of England’s Monetary Policy Committee (MPC) today voted in favour of reducing the base rate to 3.75%. This is the first time the UK’s central interest rate has sat below 4% in over two-and-a-half years.

Also known as the ‘bank rate’, the base rate is the amount of interest the Bank of England charges other financial institutions to borrow money which, in turn, can influence the pricing of mortgages and savings products.

Last month, the MPC decided by a knife-edge to hold the base rate at 4%. However, with latest figures from the Office for National Statistics (ONS) revealing inflation dropped more than expected to 3.2% in November, while the economy shrank and unemployment rose slightly in October, this might have spurred the nine-person rate-setting committee into action.

Over 90% of providers responded to the last cut by lowering rates

But, even though lowering the base rate can help to boost the economy (by making borrowing cheaper and stimulating greater levels of spending), it could spell misery for savers as banks and building societies take the opportunity to cut rates. In fact, Rachel Springall, Finance Expert at Moneyfactscompare.co.uk, revealed more than 90% of savings providers have lowered rates in some form since the last base rate reduction in August.

Over the course of a year, this (and two previous base rate cuts in February and May) saw the Moneyfacts Average Savings Rate fall from 3.68% in December 2024 to 3.40% by the start of this month.

Variable savings rates are especially vulnerable to changes to the base rate, with typical returns on an easy access and notice accounts dropping 0.42 and 0.60 percentage points to 2.54% and 3.50%, respectively. In fact, more than three-quarters (77%) of easy access accounts currently on sale pay less than 3.75%, with only one in 10 offering more than 4.00%.

An early present for mortgage borrowers?

In contrast, mortgage borrowers might consider today’s base rate reduction to be an early Christmas present. But, keep in mind only those on a variable rate are likely to feel any immediate benefit as lenders often pre-emptively price in market forecasts when setting their fixed mortgage rates.

That being said, anyone sitting on their lender’s Standard Variable Rate (SVR) may find it more affordable to secure a fixed deal. “The incentive to switch from a revert to rate to a two-year fixed could save borrowers £369 per month on their mortgage repayments, which is almost £4,500 over 12 months^*,” said Springall.

Anticipation of interest rate cuts this year mean fixed mortgages are now cheaper than in December 2024. The average rate charged by a two-year fixed deal fell from 5.52% to 4.86% year-on-year, for instance, while the average five-year fixed rate dropped from 5.28% to 4.91% over the same period. And, with UK Finance estimating that 1.8 million fixed mortgages are due to expire in 2026, this will no doubt be welcome news to many borrowers.

“Those coming to the end of their fixed term may feel uncertain about what to expect heading into 2026. However, today’s base rate cut could be a positive sign of things to come,” said Oliver Dack, Spokesperson at Mortgage Advice Bureau.

“We’re expecting interest rates to continue falling next year, in which case, those who locked into a more expensive fixed deal only a couple of years ago could benefit from talking through their options with a mortgage broker – even if they’re still a way off reaching the end of the term,” he added.

“In some instances, it might be more cost-effective to shoulder any Early Repayment Charges (ERCs) and move onto a lower rate. Alternatively, those who can comfortably meet their monthly repayments may find they’re able to borrow more money or repay their mortgage early with a cheaper deal,” Dack explained.

Meanwhile, Springall warned those who took out a cheap fixed deal five years ago that they must accept they’ll have to cover higher repayments – adding that the Bank of England expects 3.9 million households will refinance onto more expensive rates over the course of the next three years.

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