The Bank of England has provided a pre-holiday gift to borrowers by reducing interest rates to the lowest point since February 2023. The Monetary Policy Committee voted 5-4 to lower the base rate from 4% to 3.75%, marking the sixth cut since August of the previous year. Bank Governor Andrew Bailey’s support for the cut was pivotal, especially following a favorable slowdown in inflation.
This rate reduction is expected to benefit borrowers with variable rate mortgages and is likely to drive down fixed-rate mortgage costs for new loans or remortgages. However, it may pose a challenge for savers if financial institutions decrease interest rates for depositors.
Chancellor Rachel Reeves noted that this is the sixth interest rate cut post-election, marking the quickest series of cuts in 17 years. She emphasized the positive impact on families with mortgages and businesses with loans, while acknowledging the need for more measures to address the cost of living.
TUC General Secretary Paul Nowak welcomed the rate cut but emphasized the necessity for further and faster actions due to the economy’s fragility. The call is for a sequence of substantial rate cuts to boost confidence, encourage investments, and stimulate spending.
The decision to cut rates follows a decline in inflation to an eight-month low of 3.2% in November, driven by decreases in food and drink inflation as well as alcohol and tobacco prices.
Marylen Edwards, director of mortgages at specialist lender MT Finance, expressed optimism about the market’s response to the rate cut, especially with the recent reductions by the US Federal Reserve and the decrease in inflation. The move is expected to instill confidence and lead to increased transactions in the upcoming New Year.
The Bank of England’s base rate has seen a gradual decrease from 5.25% in 2023 to the current 3.75% after several cuts since August 2024. The recent cut is estimated to save borrowers with variable rate mortgages significant amounts monthly, resulting in annual savings.
Bank Governor Andrew Bailey highlighted the decline in inflation as a key factor in the decision to cut borrowing costs. While inflation remains above the Bank’s 2% target, measures announced in the recent Budget are expected to further lower inflation rates.
The Bank anticipates a continued slow pace for the UK economy, with no growth projected in the final quarter of the year. Concerns about persistent inflation, particularly in the services sector and wage growth, influenced the decision-making process.
Economic experts forecast a gradual decline in the base rate in the coming year, with predictions ranging from a return to 3% by the end of the year to additional rate cuts in 2026.
Stuart Morrison from the British Chambers of Commerce welcomed the interest rate cut as a positive development for businesses, despite ongoing challenges in unlocking growth. The decision reflects the current economic conditions and the need for further evidence of inflation control before additional rate cuts are considered.