The Bank of England has reduced interest rates to the lowest level since February 2023, providing borrowers with an early Christmas gift. The Monetary Policy Committee voted 5-4 to lower the base rate from 4% to 3.75%, marking the sixth cut since August last year. The decision by Bank Governor Andrew Bailey to support the cut was crucial and came amid a welcomed slowdown in inflation.
This rate cut is expected to benefit borrowers with variable rate mortgages and may lead to reduced fixed rate mortgage costs for new loans or remortgages. However, it could pose challenges for savers if financial institutions lower deposit rates. Chancellor Rachel Reeves highlighted the positive impact of the interest rate cuts on families and businesses, emphasizing the ongoing efforts to address the cost of living concerns.
TUC General Secretary Paul Nowak expressed support for the rate cut but emphasized the need for further and quicker rate reductions to boost the economy. The latest cut follows a decrease in inflation to an eight-month low of 3.2% in November, driven by lower food and drink prices.
Marylen Edwards, director of mortgages at MT Finance, welcomed the MPC’s decision to cut rates, expecting it to boost market confidence and stimulate transactions in the upcoming New Year. The Bank of England’s base rate, which peaked at 5.25% in 2023, has seen multiple cuts since August 2024, now standing at 4%.
The rate cut is estimated to save borrowers with variable rate mortgages around £29 per month on a £175,000 balance, with potential annual savings of nearly £350. Bank of England Governor Andrew Bailey indicated that the recent decline in inflation allowed for the rate cut, with expectations of further decreases in the future. The Bank anticipates a gradual decline in rates, closely monitoring economic indicators and inflation levels.
Despite the rate cut, the Bank cautioned about the sluggish growth of the UK economy, with concerns about persistent inflation and wage growth among some MPC members who voted to keep rates unchanged. Economists predict further rate cuts in the coming year, with expectations of the base rate potentially reaching 3% by late next year. Stuart Morrison from the British Chambers of Commerce acknowledged the positive impact of the rate cut on businesses but highlighted the challenges in achieving sustainable growth.
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