The Bank of England has cut interest rates to 5 per cent, the first reduction since March 2020.
The Bank’s Monetary Policy Committee (MPC) voted 5-4 in favour of reducing the bank rate by 0.25 percentage points. Four members preferred to maintain the rate at 5.25 per cent. Governor Andrew Bailey had the casting vote.
Financial markets had been split on whether a rate cut, or a hold was imminent.
The reduction follows a fall in inflation to 2 per cent in May, reaching the Bank’s target for the first time since July 2021. It stayed at the same level in June.
However, the Bank also released a report alongside its interest rate decision, which showed inflation is forecast to increase to around 2.75 per cent in the second half of this year.
Bailey said: “Inflationary pressures have eased enough that we’ve been able to cut interest rates today. But we need to make sure inflation stays low, and be careful not to cut interest rates too quickly or by too much. Ensuring low and stable inflation is the best thing we can do to support economic growth and the prosperity of the country.”
The Chancellor Rachel Reeves added: “While today’s cut in interest rates will be welcome news, millions of families are still facing higher mortgage rates after the mini-Budget. That is why this Government is taking the difficult decisions now to fix the foundations of our economy after years of low growth, so we can rebuild Britain and make every part of our country better off.”
When will the base rate fall again?
It remains to be seen whether economists believe interest rates will fall again in September.
Many had hoped for an August cut along with others later this year but Bailey’s warning that the Bank should not cut “too quickly or by too much” may give pause for thought as to whether another cut will be imminent.
Instead it may be more likely in November.
Experts acknowledge that any changes will be dependent on whether inflation increases again.
Alpesh Paleja, interim deputy chief economist at the CBI, said: “At best, there is only mixed evidence that inflation persistence has been defeated. While the labour market is loosening and wage growth slowly easing, the unexpected strength in services inflation remains a red flag.
“We still think that today’s meeting marks the start of a rate cutting cycle, but the pace of this is now more uncertain. Several MPC members will be looking for more definitive signs of inflation persistence easing, to be swayed towards reducing rates further.”
Janet Mui, head of market analysis at wealth manager RBC Brewin Dolphin, added: “Any judgement is prone to risk, so the MPC emphasised that forthcoming decisions on interest rates will be on a meeting-by-meeting basis. It will not pre-commit or guide on the extent of successive rate cuts. This is particularly relevant as its inflation forecasts point to a re-acceleration by year end.”
What will this mean for mortgage holders and renters?
This will be welcome news for homeowners. Those on tracker or standard variable rate mortgages could see a drop in rates.
However, those on fixed rates, where the interest rate is locked for a set period of time, will not see a change to their repayments straight away.
But, as mortgage rates are likely to come down in line with the rate cut, those remortgaging in the future may be able to move onto a better deal.
These rates have already come down in recent months since a peak last summer, with major lenders making cuts consistently over the past few weeks.
Nick Mendes of brokers John Charcol said: “Today’s announcement is a positive step for the property and mortgage market. Positivity spreads quickly and while today’s rate cut would have already been priced in, this will undoubtedly revitalise activity.
“Mortgage holders nearing the end of their fixed-rate period and prospective buyers can now make informed decisions with greater confidence, rather than delaying and speculating.
“For borrowers approaching the end of their fixed-rate terms, this decision brings a much-needed sigh of relief following months of fluctuating mortgage rates and reductions not aligning with early market expectations.”
He said he expects the downward trend in fixed-rate costs to continue into next year, as markets price in further bank rate cuts.
“Lenders will use every opportunity to stay ahead of the competition by actively passing on reductions in swap rates. With this in mind a 3.5 per cent five-year fixed rate could be within reach by early next year.”
Matt Smith, Rightmove’s mortgage expert, added: “The highly anticipated rate cut has finally arrived, and while those looking to take out a mortgage soon shouldn’t expect to see drastically lower mortgage rates, we would expect the downward trend we’ve started to see continue. This sets us up for hopefully further cuts to come, and when we have seen further reductions to the base rate, people should really start to see the impact.”
Renters are indirectly affected by landlords’ mortgage costs. It remains to be seen whether they decrease but if so, it is unlikely to be immediate as plenty of landlords will still be remortgaging this year and next, seeing steep increases that they may pass on.
What does it mean for savers?
One of the least positive outcomes from lower interest rates is lower savings rates. It may not be immediate but with lower interest rates, it is likely that providers will alter the rates they offer.
Currently, the best deals include Oxbury’s easy-access account offering 5.04 per cent.
If you opt for a fixed rate rather than an easy-access rate, the interest will be guaranteed for the term of the deal, meaning you can be certain your returns will beat inflation.
Alice Haine, personal finance analyst at Bestinvest by Evelyn Partners, said: “A rate reduction is less of a boon for savers who have been enjoying a savings sweet spot of late as easing inflation collides with still-high interest rates delivering a real return for more accounts.
“Those that want to preserve their return must move fast by locking in the best deal possible while interest rates remain relatively high. This is particularly important for anyone with money idling in an account offering an ultra-low return.”
People with a loan or credit card debt could, in theory, see their interest rates get slightly cheaper.
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