Bank of England in “tricky position” on base rate
UK consumer price inflation rose to 3.8% in the year to July 2025, according to the latest figures from the Office for National Statistics (ONS), up from 3.6% in June.
The higher-than-expected increase means the Bank of England now faces a more difficult decision on whether to adjust the base rate at next month’s monetary policy meeting.
The Consumer Prices Index (CPI) rose by 0.1% in July on a monthly basis, reversing a 0.2% decline seen in July last year.
“Inflation rose again this month to its highest annual rate since the beginning of last year,” said ONS chief economist Grant Fitzner, commenting on the July CPI numbers. “The main driver was a hefty increase in air fares, the largest July rise since collection of air fares changed from quarterly to monthly in 2001. This increase was likely due to the timing of this year’s school holidays.
“The price of petrol and diesel also increased this month, compared with a drop this time last year. Food price inflation continues to climb, with items such as coffee, fresh orange juice, meat and chocolate seeing the biggest rises.”
The Consumer Prices Index (CPI) rose by 3.8% in the 12 months to July 2025, up from 3.6% in the 12 months to June 2025.
— Office for National Statistics (ONS) (@ONS) August 20, 2025
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Inflation trends remain central to the Bank of England’s approach to monetary policy. When inflation moves above the 2% target, the central bank may opt to raise the base rate to curb spending and lending, aiming to return inflation to target. If inflation falls below target, the bank may lower rates to encourage economic activity. The objective is to keep inflation close to target to support price stability and economic growth.
“Unfortunately, any increase seen within the rate of inflation does bring very justified concerns to consumers, many of whom are still struggling with the cost of living, which has been steadily rising over the past few years,” said Nathan Emerson, chief executive of industry body Propertymark.
“Although there is more work to be done to help ensure inflation tracks back down towards the Bank of England’s target of 2%, we have seen three base rate cuts across 2025, which have provided instant benefit to those on tracker mortgages and additional new competitive rates from many lenders.
“It remains important that the UK government and devolved administrations keep a tight focus on the fact that housing plays a central role in providing consistency within the UK economy and that delivering a range of sustainable housing options brings both long-term stability and an opportunity for regional growth.”
Paresh Raja, chief executive of specialist lender Market Financial Solutions, said today’s data “highlights the tricky position facing both the Bank of England and the government.”
“Bolstered by a reasonably strong July, the economy limped through Q2 with growth of just 0.4%,” he pointed out. “Meanwhile, inflation is running at almost double the bank’s 2% target, leaving policymakers with a stark choice – cut the base rate further and risk entrenching inflation, or stick to a cautious approach and further strangle economic growth.
“What is clear, however, is that the property market is holding firm in spite of these notable issues. House prices continue to rise, while mortgage rates have edged down towards their lowest levels in years. Taken together, this should lift buyer confidence and fuel greater market activity in the coming months.”
“Interest is now slowly turning to the Autumn Budget. The potential for tax hikes - and radical speculation about potentially replacing Stamp Duty with a new property tax - could start to weigh heavily on the market. So, it’s crucial that lenders and brokers continue to support borrowers as they navigate a perennially uncertain economic environment.”
Mortgage adviser David Titherington said brokers and lenders are both “well-rehearsed now with this.”
“We’re hoping interest rates don’t go up, but I know cost of living will, so hopefully the buffer that lenders have put into place will also help,” he said. “We also do a budget for the client, and we have to make them aware if it’s tight.”
“If things are getting too tight, speak to the lender. Don’t miss a payment—just speak to them. They don’t want to be repossessing properties. They would rather work with the client than for them not to say anything at all.”
Titherington believes interest rates will continue to stay stagnant for a little while, though they have come down significantly compared to a couple of years ago.
“With mortgage rates coming down, and the fact that the cost of living and prices in the shops are going up, it might just even each other out, and you’re going to be paying roughly the same as you were a year or two ago. It’s going to stretch yourself, but at least we get a roadmap in place.”
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