The Bank’s Monetary Policy Committee (MPC) have today announced a reduction to the bank base rate.
The Bank of England cut interest rates from 5.25% to 5% in August, which was the first drop in more than four years following a string of increases.
Since then, official figures have revealed that the UK inflation rate – which charts the rising cost of living dropped to 1.7% in September.
That was the lowest rate for three-and-a-half years and below the 2% target set by the government. Interest rates are the main tool for the Bank to control the level of inflation.
What Does it Mean?
The base interest rate set by the Bank plays a crucial role in determining the rates that High Street banks and other financial institutions charge for loans, mortgages and credit cards.
Lenders have largely anticipated the effects of a base rate reduction when establishing their own interest rates.
Currently, mortgage rates remain considerably higher than they have been for much of the past decade. According to financial information provider Moneyfacts, the average rate for a two-year fixed mortgage stands at 5.4%, while a five-year fixed mortgage averages 5.11%.
Nevertheless, over one million borrowers with tracker and variable rate deals may experience an immediate decrease in their monthly payments after today’s decision.
On the other hand, savers are likely to encounter a decline in the returns provided by banks and building societies. The current average rate for an easy access savings account is approximately 3% per annum.
Rachel Springall from Moneyfacts remarked, “Savers are the ones who bear the brunt of interest rate cuts. Those who rely on interest income will feel neglected if rates significantly decrease.”
Budget and Election Impact
The impact of the budget and the recent US election on economic policy is significant. Political developments will played a crucial role in the Bank’s decision, particularly in light of last week’s Budget presented by Chancellor Rachel Reeves and Donald Trump’s recent electoral victory.
The Office for Budget Responsibility, the government’s official yet independent forecaster, has indicated that the measures outlined in the Budget are likely to elevate inflation and interest rates in the short term beyond what they would have been otherwise.
This situation has raised uncertainties regarding the likelihood of the Bank of England implementing further interest rate cuts following its December meeting.
Additionally, analysts predict that US inflation may rise due to expectations that President Trump will impose higher tariffs on all imports next year. This scenario could limit the Federal Reserve’s ability to lower interest rates, potentially influencing economic decisions on a global scale.
What About Longer Term
Money markets had a 97% probability of a quarter-point reduction prior to today’s meeting, despite analysts cautioning that further cuts may be postponed due to the government’s tax-and-spend budget.
Goldman Sachs noted in a report last Thursday that “prospects for stronger growth in 2025 are likely to diminish the urgency for sequential cuts in the near term.”
Policymakers have indicated a “gradual approach” to rate reductions following their decision to maintain rates during the September meeting. However, economists had raised their expectations for a more rapid pace of easing after a significant decline in inflation to 1.7% and a slowdown in wage growth before the budget announcement.
These expectations were subsequently tempered after U.K. Finance Minister Rachel Reeves revealed £40 billion in tax increases and modifications to the U.K.’s debt regulations, which the Office for Budget Responsibility (OBR) cautioned could lead to increased near-term growth and inflation.