Why were interest rates cut and what does this mean?

The Bank of England cut interest rates for the second time in four months after inflation returned to normal levels earlier this year.

Rates had been at 5% after policymakers previously cut them over the summer, and they dropped again on Thursday.

Here, the PA news agency looks at what the decision means and what the Bank expects from the economy.

The Bank of England’s Monetary Policy Committee (MPC) cut its benchmark interest rate to 4.75%, a quarter point.

This is the second time interest rates have been cut this year, following a period of higher borrowing costs amid soaring inflation in 2022 and 2023.

Eight members of the Bank’s monetary policy committee voted in favor of reducing the base rate, while one preferred to leave it unchanged.

The prime rate helps determine how much it costs to take out a mortgage or loan.

Rising rates in recent years have pushed mortgage rates much higher than usual for most of the last decade.

But the latest cut is unlikely to lead to an immediate decline in mortgage rates as it is “almost fully priced in” by servicers, according to Laith Khalaf, an analyst at investment firm AJ Bell.

In fact, the impact of past interest rate increases continues to increase borrowing costs for existing mortgage holders.

About 800,000 fixed-rate mortgages with interest rates of 3% or lower are expected to be refinanced on average per year through the end of 2027.

But variable mortgages “should fall” as a result of the cuts, Mr. Khalaf added.

The prime rate also determines the interest rates banks offer on savings accounts, meaning they are likely to fall.

Raising interest rates is the central bank’s main way of reducing inflation – a measure of how quickly prices rise over time.

The main economy-wide measure of inflation fell to 1.7% in September, below the Bank’s target of 2%, prompting the rate cut.

But inflation is expected to rise again by the end of this year as energy costs rise over the winter.

Inflation is expected to remain high for longer than previously forecast following spending and tax increases announced in Labour’s autumn budget, the Bank said.

The MPC, which decides on rates, is due to meet again this year and most experts believe they will not cut rates.

Mr Bailey repeated his call for rates to be cut “gradually”, saying the Bank should not cut rates “too quickly or too much”.

Sarah Coles, from investment platform Hargreaves Lansdown, said: “The Bank of England has made another discount before many expect it to close its shops for a while and wait for the dust to settle.”

She cited increased fiscal borrowing, increases in the minimum wage and increases in employers’ national insurance contributions, which were mentioned in the Bank’s latest report as potentially fueling inflation, as reasons.

Rachel Reeves said interest rate cuts would be “welcome news” for millions of families, but households were still facing problems following Liz Truss’ mini-budget.

“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 face in the wake of the previous government’s mini-budget,” the chancellor said.

“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.”

Mortgage rates are still high, but the base rate cut is good news for the housing market. This also indicates that the Bank believes inflation is under control.

This is a small positive for consumers as it means prices for everyday goods are rising more slowly than before.

The Bank’s latest economic report also showed that economic growth next year will be higher than previous estimates, partly due to additional spending and borrowing included in the budget.

Mr Bailey said the fall in inflation was “not only continuing but has actually been faster than we expected, which is good and encouraging”.

Donald Trump’s victory in the US election this week brings with it the threat of trade tariffs, a key policy he has touted.

Many experts believe Trump’s policies could end up fueling higher inflation in the UK.

Mr. Bailey said he would work “very closely” with the US administration but declined to speculate on Trump’s potential policies.

He said, “Let’s wait and see where this goes. I’m not going to prejudge what might happen, what might not happen, and where the policy will go.”

Mr Bailey added: “I think we need to look very closely at the fragmentation of the global economy. I’ll say it.”