Bank of England interest rate decision confirmed – what it means for you
THE Bank of England has cut interest rates for the first time since 2020.
At the Monetary Policy Committee’s (MPC) meeting today, ratesetters at the BoE reduced the base rate from 5.25% to 5%.
The decision to cut rates was finely balanced with five members, including Governor Andrew Bailey, outvoting four Bank members who wanted to keep rates higher for longer.
The Bank’s chief economist Huw Pill was amongst those who wanted to keep rates unchanged at 5.25%.
Mr Bailey said on the cut: “Inflationary pressures have eased enough that we’ve been able to cut interest rates today.
“But we need to make sure inflation stays low, and be careful not to cut interest rates too quickly or by too much.
“Ensuring low and stable inflation is the best thing we can do to support economic growth and the prosperity of the country.”
The Bank said that the decision to lower rates was based on views about the “normalisation in inflation” and signs that the rate of wage increases was also slowing.
Those four members who wanted to keep rates high had raised concerns about sticky services inflation, which remains at 5.6% as restaurants, pubs and hotels continue to hike prices.
The Bank’s own figures suggest inflation could creep higher again to 2.75% by the end of the year.
Money markets are currently predicting the bank rate will reduce to 3.25% in three year’s time – not the recent lows of 0.5%
Commenting on the BoE’s decision today, Chancellor Rachel Reeves said: “While today’s cut in interest rates will be welcome news, millions of families are still facing higher mortgage rates after the mini-budget.
“That is why this Government is taking the difficult decisions now to fix the foundations of our economy after years of low growth, so we can rebuild Britain and make every part of our country better off.”
The BoE base rate is the interest rate charged to smaller high street banks and lenders, which are passed on to consumers.
The central bank’s decision comes after the Office for National Statistics (ONS) revealed inflation stood at 2% in June.
This was the same as in May and down from 2.3% in the 12 months to April, which marked the lowest level in around three years.
Inflation, a measure of how much the prices of everyday goods like food and clothes are now compared to the same time last year, has also plummeted from a peak of 11.1% in October 2022.
The BoE’s base rate previously increased from historic lows of 0.1% in December 2021 to 5.25% in July 2023, which it was at until today’s drop.
It has seen mortgage rates go up for millions of households – adding thousands of pounds to some bills.
But the upturn in the base rate has also seen rates on savings accounts pushed up.
With inflation slowing, some economists had been predicting the BoE would bring down interest rates and ease pain on mortgage holders.
If banks and building societies pass the changes onto consumers, it is good news for borrowers, such as homeowners, who may see mortgage rates drop.
But it means savers will also see the amount paid on their nest eggs weaken.
Here we explain what the rate dropping today means for your money.
Mortgages
If interest rates fall, it usually means mortgage rates will too.
When you will see the fall take effect depends on which type of home loan you have.
Those on tracker and standard variable rate (SVR) mortgages usually see an immediate change in payments.
There are 643,000 customers on tracker mortgages and 624,000 on SVRs.
UK Finance says today’s 0.25% rate cut will immediately save homeowners on the average tracker mortgage £28.44 a month or £341 a year.
Unfortunately, those on fixed-rate mortgages won’t see anything change until their deals ends and they take out a new one.
The vast majority of mortgage holders are on fixed deals – almost 7million.
Around 700,000 fixed rate mortgage deals are due to end in the second half of this year, according to UK Finance.
When rates jumped up to 6%, borrowers on fixed-rate deals faced huge increases in mortgage bills and it made it harder for first-time buyers to get on the ladder.
Unfortunately, brokers do not think rates will ever return to record lows of 1 or 2%.
But rates are coming down slightly.
A number of major banks have cut rates ahead of the decision today.
It comes as Nationwide became the first lender to offer a sub 4% rate on a mortgage since February.
Meanwhile, Santander was the first lender to announce a change to mortgage rates in line with the bank rate cut, closely followed by Coventry Building Society.
Credit card and loan rates
If the base rate is lowered, the cost of borrowing through loans, credit cards and overdrafts can also fall.
However, certain loans, such as personal loans or car financing, usually stay the same, as you have already agreed on a rate.
But you may be charged a lower rate on a future loan, and lenders may drop the rate on credit cards and overdrafts.
Your lender will let you know before making any changes.
Savings rates
Savers are the main group to have benefited from rising interest rates.
This is because banks tend to battle over offering market-leading rates, although they can be a lot slower to pass on customers.
The average easy access savings account rate in August 2023 was 2.81%, compared to 3.15% this August, according to Moneyfacts.
Meanwhile, the average easy access ISA rate was 2.86% in August 2023, rising to 3.36% this August.
However, if interest rates fall, it can spell bad news for those with a nest egg.
Santander has already dropped rates on some of its savings accounts by 0.25% following the BoE’s announcement today.
But not all savings account rates will fall immediately and you could lock in a good deal now.
Adam Thrower, head of savings at Shawbrook said: “A cut is disappointing news for any savers who haven’t yet taken advantage of the higher savings rates that have been offered over the past few years, as savings rates will almost certainly start to fall.
“While time might be tight, long-term fixed rates can still be secured at competitive rates.
“We are already seeing indications that long-term fixed rate accounts are in demand and locking in rates now could lead to above inflation returns for several years.”
Pensions
The BoE’s base rate also impacts pensioners looking to buy an annuity.
A pension annuity converts your pension pot into a guaranteed regular income for the rest of your life.
But because annuity rates are linked to the cost of Government borrowing, any rise or fall in the BoE’s base rate can have an impact on the rate you receive.
The income you receive can be locked in on the day you purchase your annuity, so current annuity rates can make a big difference to your long-term financial security.
With interest rates going down, pensioners may be able to secure less favourable rates.
But it’s important to make sure you are getting the best deal before making any rash decisions.
Lily Megson, from My Pension Expert, said: “As conditions start to stabilise, many will be eager to get their savings goals back on track. But it’s key not to make any hasty decisions.
“For instance, some might be tempted to quickly buy an annuity, as annuity rates may fall in response to the lower interest rates.
“However, such decisions should always be made with careful consideration.”
How to get the best deal on your mortgage
IF you're looking for a traditional type of mortgage, getting the best rates depends entirely on what's available at any given time.
There are several ways to land the best deal.
Usually the larger the deposit you have the lower the rate you can get.
If you’re remortgaging and your loan-to-value ratio (LTV) has changed, you’ll get access to better rates than before.
Your LTV will go down if your outstanding mortgage is lower and/or your home’s value is higher.
A change to your credit score or a better salary could also help you access better rates.
And if you’re nearing the end of a fixed deal soon it’s worth looking for new deals now.
You can lock in current deals sometimes up to six months before your current deal ends.
Leaving a fixed deal early will usually come with an early exit fee, so you want to avoid this extra cost.
But depending on the cost and how much you could save by switching versus sticking, it could be worth paying to leave the deal – but compare the costs first.
To find the best deal use a mortgage comparison tool to see what’s available.
You can also go to a mortgage broker who can compare a much larger range of deals for you.
Some will charge an extra fee but there are plenty who give advice for free and get paid only on commission from the lender.
You’ll also need to factor in fees for the mortgage, though some have no fees at all.
You can add the fee – sometimes more than £1,000 – to the cost of the mortgage, but be aware that means you’ll pay interest on it and so will cost more in the long term.
You can use a mortgage calculator to see how much you could borrow.
Remember you’ll have to pass the lender’s strict eligibility criteria too, which will include affordability checks and looking at your credit file.
You may also need to provide documents such as utility bills, proof of benefits, your last three month’s payslips, passports and bank statements.
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