The Bank of England has announced a reduction in interest rates to the lowest level since February 2023, providing a timely boost for borrowers ahead of the festive season. The Monetary Policy Committee, with a narrow majority vote of five to four, decided to lower the base rate from 4% to 3.75%, marking the sixth cut since August last year. The decision was influenced by Bank Governor Andrew Bailey’s support, reflecting the anticipated easing of inflation.
This rate cut is expected to benefit borrowers with variable rate mortgages, potentially leading to reduced costs for new loans or remortgaging with fixed rates. However, it may pose challenges for savers if financial institutions lower deposit interest rates. Chancellor Rachel Reeves welcomed the move, highlighting the positive impact on families with mortgages and businesses with loans, while acknowledging the ongoing efforts to address the cost of living through measures like freezing rail fares, reducing prescription charges, and cutting energy bills.
TUC General Secretary Paul Nowak expressed appreciation for the rate cut but emphasized the need for more aggressive and frequent reductions to stimulate the economy. The recent decline in inflation to 3.2% in November, driven by easing food and drink prices, set the stage for the Bank of England’s decision. Marylen Edwards, director of mortgages at MT Finance, noted that the rate cut aligns with global trends following the US Federal Reserve’s similar actions. She anticipates increased market confidence and transaction activity in the upcoming New Year.
The Bank of England’s base rate, which peaked at 5.25% in 2023, has steadily decreased through five cuts since August 2024, reaching 4% before the recent adjustment. The rate reduction is estimated to save an average borrower with a variable rate mortgage of £175,000 around £29 per month, resulting in annual savings of nearly £350. Mr. Bailey highlighted the declining inflation trend as a key factor behind the decision, signaling a potential downward trajectory for future rate adjustments.
While inflation remains above the Bank’s 2% target, forecasts suggest that recent budgetary measures will help lower the consumer prices index, potentially bringing inflation closer to the desired level by the second quarter of 2026. Analysts anticipate a gradual decline in interest rates, with varying opinions on the timing and extent of future cuts. Despite concerns about the UK economy’s slow growth, the decision to lower rates was deemed necessary to support businesses amidst ongoing challenges.
Looking ahead, the Bank of England’s base rate is projected to gradually approach 3% by late next year, with expectations of additional rate cuts in 2026. The rate adjustment, seen as a timely Christmas gift for UK businesses, aims to address economic stagnation and financial pressures. However, uncertainties persist regarding the need for further rate cuts next year, subject to evolving economic conditions and inflation dynamics.