The highly anticipated decision echoed market expectations and the ongoing economic challenges, following the previous decision to hold base rates. Today the reduction to the base interest rate from 4.75% to 4.5% is hoped to support a slowing economy and offer relief to borrowers. The last time the rate was lowered was last November. The cut today underscores a crucial pivot in our central bank’s monetary policy. The focus is now shifting from inflation to also fostering a more robust economic recovery.
The Bank’s Monetary Policy Committee (MPC) took the decision to cut rates by a quarter percentage point but some in the committee has advocated for an even larger reduction of a full half percentage point to better stimulate growth. This divergence of opinion highlights the delicate balancing act currently at play. Inflation remains a persistent concern, but there is growing anxiety that the cost of borrowing could be holding back demand at a time when the economy is already on the brink.
Today's rate decision comes amid a series of recent monetary policy adjustments that began in August 2023. With inflation in check yet economic momentum waning, the Bank has gradually shifted its policy stance. Recent forecasts suggest that the our economy is on the edge of recession, but somehow managing to avoid a formal downturn only by a very narrow margin. The base rate cut is seen as a necessary step to provide additional policy room to support growth.
By lowering the base rate, it effectively reduces the cost of borrowing. For households, this means that variable-rate mortgages and loans tied directly to the base rate will become cheaper, potentially easing the burden on those with existing debt or helping first-time buyers access the property market. For businesses, lower borrowing costs can facilitate investment and expansion, helping to reinvigorate economic activity. However, while these measures are designed to stimulate spending and investment, they also come with downsides—most notably, savers may see their returns fall as the interest earned on bank deposits dips along with the official rate.
Over the decades, the base rate has served as one of the primary tools of the Bank of England in steering the economy. At various times, the rate has been hiked sharply to combat runaway inflation and then slashed to encourage growth during periods of economic fragility. In recent history, following the near-zero rates observed during the 2020 pandemic, the Bank reintroduced rate hikes to counter inflationary pressures. The current level, at 4.5 percent, is still considerably higher than the rates seen in the recent pandemic era. However, it marks a deliberate move away from tightening policy as the underlying concern shifts from soaring prices to sluggish growth.
The Monetary Policy Report accompanying this lunchtime announcement downgraded the growth expectations for the current year and projected a continued period of economic weakness over the next few years. Interestingly, the report also raised the inflation forecast even as it signalled that the trajectory might soon head toward the Bank's mandated 2 percent target. It looks like the BoE is now more prepared to allow for some degree of inflation, as long as it does not spiral out of control, purely in the pursuit of growing the broader economy.
Markets and analysts are already pricing in the possibility of up to three or four additional rate cuts later this year with the Bank appearing to be working on a "rate‐cut roadmap" where further decreases are offered as a promise to revitalize consumer spending and business investment.
So, Homeowners, particularly those with tracker mortgages, may quickly benefit from lower repayments, giving a little breathing space to their budgets. On the flipside, people relying on interest income from savings accounts might find their returns not so pleasing to the purse, leading to tightening of their budgets. This divergence underlines the inherent trade-offs in monetary policy: what helps borrowers may hurt savers, and vice versa.
You can use our quick calculator to see how the rate cut affects your mortgage.