The Bank of England has today finally implemented a reduction in interest rates……. The first time in four years, as inflation remains stable at its targeted two percent for two consecutive months.
The Bank Rate has been adjusted to five percent, marking a decrease of 0.25 percentage points. The last rate moment was in August 2023 when it was increased. This marks the first instance of a rate reduction in the UK since the onset of the Covid-19 pandemic in March 2020.
The decision is likely to be well-received by contractor homeowners who have been grappling with escalating mortgage payments over the past year. Interest rates had maintained a 16-year high over the last 12 months, leading to a surge in mortgage rates.
There was a division among analysts regarding the direction the Bank of England would take, with one expert describing the situation as “on a knife edge.” When asked by a passer-by on Thursday morning if the rate would decrease that day, Bank of England Governor Andrew Bailey reportedly responded, “Who knows.”
The Monetary Policy Committee (MPC) of the Bank, chaired by Mr. Bailey, is responsible for setting the Bank Rate. Some individuals were disappointed by the group’s decision not to lower the base rate last June, especially since inflation had already reached 2 percent at that time. Mr. Bailey stated, “Inflationary pressures have eased sufficiently for us to reduce interest rates today. However, we must ensure that inflation remains low and exercise caution in not reducing interest rates too rapidly or significantly. Maintaining low and stable inflation is crucial to supporting economic growth and the prosperity of the nation.”
While the rate reduction is positive news for many, it still remains far from the levels observed between 2008 and 2021. During this period, the rate never exceeded 0.75 percent and even lingered at 0.1 percent for several months until late 2021.
Mortgage rates have surged alongside the rise in interest rates, resulting in many contractors facing substantially higher bills. Approximately 1.6 million mortgage-holders are anticipated to reach the end of fixed-rate deals this year, potentially encountering an average increase of around £1,800 annually in their repayments, as estimated by the Resolution Foundation.
Financial analysts have welcomed the news, although some have highlighted lingering concerns. In response to the interest rate cut, Chancellor Rachel Reeves remarked, “While the reduction in interest rates today is positive news, numerous families are still contending with higher mortgage rates following the mini-budget. This Government is making challenging decisions now to rectify the economic foundations after years of sluggish growth, aiming to rebuild Britain and enhance every part of our nation.”
On the other hand, Carsten Jung, a senior economist at the IPPR, expressed, “The Bank of England made the right decision to reduce interest rates today, but it delayed this action for too long. The Bank’s reluctance to acknowledge the long-term impact of high interest rates has hindered the UK’s economic recovery. The UK remains 6 percent below its pre-pandemic