The Bank of England has just announced that it has cut the UK's base interest rate by 0.25%. The interest rate is now down to 5.25%.

The Monetary Policy Committee within the Bank of England that sets our current interest rates obviously felt that a further cut was needed.

The thinking behind the rate cuts is to try and stimulate the growth of our economy within the UK. The current worry is that our rate of inflation (which is 2.1%) is at risk of worsening as we are soon looking at higher food and energy costs.

This is great news for homeowners, as this will result in lower monthly repayments. It could also be passed on through banks and building societies via bank accounts, easing the pressure on consumers, homeowners and first time buyers. Although some financial companies are expected not to pass this onto customers.

The decision to reduce interest rates is also in conjunction with the fall in the strength of the sterling exchange rate. Interest rates are a real balancing act, as the committee have to determine what will stabilise the economy whilst aiming for future growth and stability too.

The interest rate reduction reflects what is happening in the US at present, as the Federal Reserve (the US equivalent of the Bank of England)cut their rates from 4.25% to a low 3%. The US have seen a huge impact on their economy after the recent 'credit crunch crisis'.

It can be a tough decision to make when the future is so uncertain. We shall just have to see how this drop in rates will affect the UK. The next meeting is set for the 6th March 2008 where they can either drop it further, raise it or keep it where it is at present.

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