In a significant move, the Bank of England announced a reduction in the base interest rate by 0.25%, bringing it down to 5%. After 14 consecutive rate rises over the last two years this decision, the first cut since March 2020, marks a turning point in the Bank's strategy to combat soaring inflation. The majority of just one pushed the decision to lower with 5-4 voting for the cut.
The cut will provide some relief for mortgage holders, especially those on variable and tracker mortgages. Many fixed-rate mortgage deals had already started to come down in anticipation of today's rate cut and as many lenders had already priced in cuts. The impact on the housing market may be to boost confidence for buyers who had been hesitant.
The Bank of England's decision to lower interest rates comes amidst a sustained decline in inflation. After reaching a peak of over 10% last year, inflation has been steadily easing, prompting the monetary policy committee to reassess and the cut now signals a shift towards supporting economic growth while still keeping inflation in check.
The Bank upgraded its forecast for UK economic growth this year from 0.5% to 1.5%, with inflation expected to rise again slightly to around 2.75% by the end of the year, before falling back. Markets are pricing in the possibility of one more rate cut this year, but further cuts are expected to be gradual.
The reduction in the base interest rate is expected to have a ripple effect on borrowers and savers across the UK. For borrowers, this could mean lower costs on mortgages and loans, potentially providing some relief in the face of the ongoing cost-of-living crisis. However, savers might see a decrease in returns on their savings accounts.
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While the Bank of England has started to ease interest rates, the future trajectory remains uncertain. Economists are divided on whether this rate cut signals the beginning of a sustained period of lower rates or a temporary measure. The Bank's future decisions will likely depend on various factors, including inflation trends, economic growth, and job market conditions. Members of the Monetary Policy Committee, who debate on the direction of the base rate, still express concerns on the effects of the cut on inflation and salary growth.