Typography is the art and technique The Bank of England (BoE) has reduced interest rates to 4.75%, marking a cautious move amid post-Budget inflation concerns.
While this rate cut signals potential relief for mortgage holders and certain businesses, it comes with a warning from the BoE that further reductions are unlikely before 2025. With a focus on controlling inflation, the central bank is taking a measured approach to interest rate changes, reflecting concerns about rising costs and a potentially slower path to economic stability.
Here’s a closer look at how this decision affects mortgages, savings, and business finances.
Why the BoE Cut Rates—and Why Further Cuts May Be Delayed
The decision to cut rates by 0.25% was largely expected, following the UK Budget’s emphasis on fiscal expansion, which economists forecasted would exert inflationary pressures. The BoE’s post-Budget outlook projects that recent tax hikes and government spending increases may drive inflation back up temporarily by as much as 0.5 percentage points.
While inflation has recently dipped to 1.7%, below the BoE’s 2% target for the first time in three years, the central bank anticipates it may climb back over the target in coming quarters. This cautious outlook has led the BoE to indicate that any further rate reductions will likely be postponed until 2025, as it closely monitors price pressures, including those stemming from the labour market and global trade dynamics.
Implications for Mortgages: Savings for Some, Stability for Others
The rate cut will have different effects depending on the type of mortgage:
Tracker Mortgages: Borrowers with tracker mortgages, which directly follow the BoE’s base rate, will see immediate savings. Roughly, this cut translates to a reduction of £15 a month per £100,000 borrowed.
Variable and Discount Rate Mortgages: Although variable and discount rates often follow the BoE’s lead, they aren’t obligated to mirror base rate changes exactly. Homeowners on these rates could still see a reduction in monthly payments, although the extent may vary by lender.
Fixed-Rate Mortgages: Fixed-rate mortgage holders won’t see any changes in their current monthly payments. However, those looking to secure a new fixed-rate deal may find some reduction in rates as lenders adjust their offerings in response to the BoE’s latest decision. Keep in mind, though, that these fixed rates are based on future interest rate predictions, so some of this adjustment may already be priced in.
Impact on Savings: Lower Returns Expected
The rate cut also affects savings accounts, particularly for those with variable rates:
Easy Access Savings Accounts: Easy access accounts, both regular and ISA varieties, are likely to see a slight decrease in returns. A 0.25% drop can be expected, although some high-interest accounts may hold off on rate cuts for competitive reasons.
Fixed-Rate Savings: For savers with fixed-rate accounts, the interest rate will remain the same for the duration of the term. However, new fixed-rate products are likely to be offered at slightly lower rates as predictions of future interest rates adjust.
Actionable Tips:
- Mortgage Holders: If you’re considering switching to a fixed-rate mortgage, it might be worth exploring available deals now, especially if you expect rates to remain low. Review your options with a mortgage advisor.
- Savers: Shop around for the best rates on easy-access accounts. Some banks may delay cutting their top savings rates, so there may still be opportunities to secure better returns.
Inflationary Pressures Ahead: The BoE’s Post-Budget Outlook
Following the latest Budget, the BoE projects that the UK’s inflation rate may temporarily climb. This is partly due to policies like increased taxes and higher national insurance contributions, as well as a higher national living wage. The Budget’s fiscal expansion could raise consumer price inflation by up to 0.5% at its peak, boosting GDP growth by 0.75% within a year.
While this growth could provide some economic momentum, the BoE is cautious about the potential for rising consumer prices, especially as businesses such as J Sainsbury and BT have already reported they expect inflationary pressure from the Budget’s changes. In particular, the increase in employer national insurance contributions may lead some businesses to pass on these higher costs to consumers.
What the Rate Cut Means for Businesses
For UK businesses, this rate cut could provide some short-term financial relief, but inflationary pressures from the Budget may offset these benefits.
Considerations for Business Owners:
- Financing Costs: Businesses with existing loans tied to the BoE base rate will benefit from lower interest payments. This can help manage cash flow, particularly for businesses operating with tight margins.
- Future Borrowing: With interest rates unlikely to fall further until 2025, now may be an opportune time to secure financing if your business has plans for growth or investment. Explore fixed-rate loan options if you want stability in repayment costs.
- Labor and Wage Costs: The Budget’s increase in the national living wage, coupled with higher national insurance costs, may lead to rising employment expenses. Consider reviewing workforce planning and budget forecasting to mitigate potential cost increases.
Global Influences on the BoE’s Decisions: US Policy and Trade Tensions
The BoE is also closely monitoring external factors that could influence inflation and economic stability in the UK. With Donald Trump’s recent election victory in the US, his support for higher tariffs may introduce further risks of global inflation. Additionally, ongoing trade fragmentation could impact the prices of goods and commodities, with the BoE’s Monetary Policy Committee noting that these developments may lead to “upside risks” in inflation.
Governor Andrew Bailey emphasized the BoE’s commitment to a cautious approach, noting that global developments must be observed closely as they unfold.