The Bank of England has provided borrowers with an early gift this holiday season by reducing interest rates to their lowest level since February 2023.
In a close vote of five to four, the nine-member Monetary Policy Committee decided to lower the base rate from 4% to 3.75%, marking the sixth cut since August of the previous year. The decision was influenced by Bank Governor Andrew Bailey and was anticipated following a favorable deceleration in inflation.
This rate cut is expected to benefit borrowers with variable rate mortgages, potentially lowering fixed rate mortgage expenses for new loans or refinancing. However, it may pose a challenge for savers if financial institutions decrease deposit interest rates.
Chancellor Rachel Reeves welcomed the rate cut, highlighting it as the sixth since the election, which is the quickest succession of cuts in 17 years. She acknowledged the need for further measures to assist families with living expenses, citing recent initiatives like freezing rail fares and prescription charges, along with a forthcoming reduction in average energy bills.
TUC General Secretary Paul Nowak expressed appreciation for the rate cut but emphasized the necessity for more aggressive and rapid cuts in the coming year to stimulate the economy. The recent drop in inflation to 3.2% in November, driven by decreases in food and drink prices, contributed to the decision.
Marylen Edwards, director of mortgages at specialist lender MT Finance, noted that the rate reduction by the MPC aligns with recent actions by the US Federal Reserve and is likely to bolster market confidence, encouraging more real estate transactions in the upcoming year.
The Bank of England’s base rate has progressively declined from 5.25% in 2023 to the current 3.75%, with intermittent pauses in September and November.
The rate cut is estimated to save an average borrower with a £175,000 variable rate mortgage around £29 per month, resulting in annual savings of nearly £350. Further reductions are anticipated, potentially saving borrowers with larger mortgages even more.
Mr. Bailey remarked on the decrease in inflation and the necessity for continued rate adjustments to support the economy. The Bank anticipates a potential return to the 2% inflation target following measures introduced in the recent Budget.
While there are expectations for further rate cuts, some members of the MPC expressed concerns about sustained inflation pressures, particularly in the services sector and wage growth.
Economists predict a gradual decrease in the base rate over the next year, with some forecasting a return to around 3% by late 2026. Business organizations welcomed the rate cut as a positive development for the economy but emphasized the need for sustainable growth strategies.
In conclusion, the recent rate cut by the Bank of England is viewed as a positive step for borrowers and businesses, with ongoing monitoring and adjustments expected to support economic stability and growth in the coming year.