Bank of England cuts interest rate to 4.75%

Bank of England reduced interest rates from 5 percent to 4.75 percent.

The bank’s Monetary Policy Committee (MPC) voted 8-1 to cut the bank rate by 0.25 percentage points. Only one member supported keeping the rate at 5 percent.

The decision to reduce the base rate has been made for the second time this year. The decision is intended to ease some of the pressure on borrowers who have faced higher mortgage and lending costs since rates began rising three years ago.

Economists expected the Bank to cut rates today. This occurs eight days after Labour’s first budget which, as expected, contained a number of tax increases.

Following the financial event, the Bank said the measures taken could cause inflation to rise by as much as half a percentage point. This could cause it to slow down its expected rate cut path.

Andrew Bailey, governor of the Bank of England, said: “Inflation is just below our target of 2 percent and we have been able to cut interest rates today. We need to ensure that inflation remains close to target so that we cannot cut interest rates too quickly or too much. But if the economy develops as we expect, it is likely that interest rates will continue to decline gradually.”

This follows a sharp fall in inflation from over 11 percent in autumn 2022 to the current rate below 2 percent, the official target, after monetary policy tightened from 0.1 percent to 5.25 percent over two years. .

Chancellor Rachel Reeves said: “Today’s interest rate cuts will be welcome news for millions of families, but I am under no illusions about the scale of the challenge households have faced since the previous government’s mini-Budget.

“This Government’s first Budget set out how we make long-term decisions to strengthen the foundations to achieve change by investing in the NHS and rebuilding Britain, while ensuring working people do not face higher taxes on their payrolls.”

Here’s what this decision means for you and your money.

When will the base rate fall again?

The Bank’s final decision on monetary policy until next year will be made on December 19. The first decision in 2025 will take place on February 6.

After this week’s cut, most economists believe it is unlikely that the MPC, which meets about every six weeks, will cut rates again this year.

A Pantheon Macroeconomics paper published after the budget but before today’s announcement said: “We still expect the MPC to cut the bank rate by just 25 basis points per quarter until it reaches 3.75 percent at the end of next year. A 25 basis point easing (in November) remains likely, but we still don’t expect any change in December.”

Looking ahead to 2025, Chris Arcari, head of capital markets at Hymans Robertson, said he expects a slower pace of rate cuts throughout the year.

He said: “The initial nature of the spending and the Office for Budget Responsibility’s (OBR) forecast of the impact on short-term economic growth and inflation has led the market to shift to expect a slower pace of rate cuts from the Bank of England.”

The bank typically keeps interest rates high to cope with high inflation and lowers them when inflation approaches its 2 percent target.

What will happen to inflation?

Inflation is now 1.7%. but most experts predict it will rise above 2 percent again this winter.

According to the Bank, the budget is tentatively expected to lift inflation by just under 0.5 percentage points at its peak.

He added that he does not expect inflation to return below the two percent target until spring 2027.

In September, the Bank outlined a “gradual approach” to easing policy.

The latest consumer price index (CPI) data released in October showed the CPI rising 1.7% year-on-year, lower than the 1.9% forecast. However, the next data, which will be published on November 20, is expected to show an increase of up to 2.2%.

Inflation is forecast to remain above target from 2026 to 2028, driven by wage growth and fiscal policy.

Pantheon Macroeconomics explained that Ms Reeves’ budget last week would increase inflation, which could mean interest rates will fall more slowly than they otherwise would.

It said: “Chancellor Reeves’ Budget increases government spending far more than we and markets expected and raises costs for employers, increasing the risk of consumer price inflation exceeding target next year.”

The bank only hinted at the impact of Trump’s presidential victory this week, as outlined in its report. Discussing near-term global risks and their potential impact on the UK’s inflation outlook, it said: “there are risks to rising commodity and commodity prices due to greater trade fragmentation and adverse geopolitical developments.”

Trump’s policies could include higher tariffs, which could have an impact on global inflation.

What will this mean for mortgage holders and renters?

Those with variable rates will see their mortgages fall immediately as a result of the cuts.

Meanwhile, 81 percent of people have fixed-rate mortgages, where the interest rate is fixed for a certain period of time, so if you use this type of loan, your payments won’t change depending on the decision.

Those rates have fallen in recent months after peaking last summer, but some lenders have begun raising them slightly again. Depending on when you locked in your fixed rate, you’ll likely pay a higher rate at renewal than before.

Nick Mendes of brokerage John Charcol said he expects mortgage rates to resume their downward trend for the rest of the year, likely returning to “the best rates we’ve seen in a while, with further improvement expected next year.” .

He said I: “Borrowers should note that current fixed mortgage rates already reflect some expected bank rate cuts next year.

“As a result, I foresee the lowest fixed rates stabilizing around the low 3 percent next year.”

However, a fall in bank rates does not always lead to an immediate decline in mortgage rates across the board.

When setting their rates, lenders take many factors into account, including service levels and general market conditions.

An important factor for lenders in determining mortgage rates are swap rates, which follow long-term projections of where the benchmark rate will go in the future.

This means that if the base rate is reduced, mortgage rates could remain the same or even rise if other factors, such as funding costs or risk assessments, change unfavorably.

However, there is hope that they will continue to fall.

David Hollingworth, associate director at L&C Mortgages, said: “The rate cuts were widely expected and will be welcomed by those tracker deal borrowers who will see their rates fall over time.

“Even though the base rate has fallen, fixed mortgage rates still fluctuate widely and many are now being increased in response to market expectations that rates may have to be cut at a slower pace.

“Further cuts are still expected next year, but borrowers currently considering a fixed rate should act quickly as there are likely to be more increases in the coming days and weeks as the market adjusts. “

What does this mean for investors?

Savers will be “the ones to feel the force of lower interest rates”, said Rachel Springall, financial expert at Moneyfactscompare.co.uk. I.

When interest rates fall, savings rates tend to do the same.

Springall said: “Those savers who use their interest to supplement their income will feel left behind if rates fall sharply.

“Savers are understandably feeling shortchanged, barely seeing a return on their money and essentially seeing the true value of their cash eroded by unprecedentedly high inflation in recent years.

“This in turn can create an almost apathetic attitude among savers today, even though the average easy-access account earns around 3 percent, the bank’s base rate is higher.”

The average easy access rate paid at the largest high street banks is less than 2 percent. This is much less than the current average market speed of access across all savings providers.

Chetwood Bank’s best easy access rate is 4.86 percent, while Atom Bank offers 4.8 percent for a one-year fixed rate.

Springall added: “Depositors can easily switch their flexible banks elsewhere. Challenger banks offer attractive returns and it would be unwise to overlook them as they have the same protections as the big banks.

“Depositors need to actively look out for the best rates and check their banks regularly to see if they are getting a good deal.”