Interest rates cut to 3.75%

The Bank of England (BoE) has cut interest rates to 3.75% - the lowest level in nearly three years.

A rate reduction had been widely expected, despite a mixed economic picture.

The unemployment rate climbed sharply in recent months, while the economy unexpectedly shrank by 0.1% in October.

But inflation fell to 3.2% in November - the lowest level in eight months and the second consecutive monthly drop.

Chancellor welcomes rate cut

"This is the sixth interest rate cut since the election," said chancellor Rachel Reeves.

"That's the fastest pace of cuts in 17 years, good news for families with mortgages and businesses with loans."

However, she acknowledged there is "more to do to help families with the cost of living". 

"That's why at the Budget we froze rail fares and prescription charges, and will be cutting £150 off the average energy bill next year."

What are interest rates?

The BoE’s interest rate - also known as the base rate - helps high street banks and lenders decide what rates to set on things like mortgages, credit cards, loans and savings accounts.

How do interest rates affect inflation?

The BoE can change interest rates to try to keep inflation under control and close to its 2% target.

Higher rates can encourage people and businesses to save more and spend less.

And over time, that can help slow down price raises.

Lower rates have the opposite effect, making it cheaper to borrow and easier to spend, which can push prices up.

How do interest rates affect my mortgage?

If you’re on a tracker or variable rate mortgage, your payments will be directly linked to the BoE base rate.

So when rates go up, the amount you pay goes up too.

And if it goes down, the amount you’re charged should fall.

But lenders don’t just look at the base rate when setting their own mortgage rates, as they’ll also weigh up factors like market conditions and risk appetite.

And if you’re on a fixed-rate mortgage, you won’t see any change until your deal ends.

How do interest rates affect savers?

Higher interest rates can be good news for savers, as they usually mean better returns on savings accounts.

But when rates fall, the interest you earn on savings usually drops too.

What if I have credit cards or loans?

High interest rates can make borrowing more expensive.

So when interest rates come down, repaying loans can get cheaper.

But that’s not the case if you have a credit card, as lenders usually set their own rates based on factors like market conditions and your credit score.