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The Bank of England has lowered interest rates to 4%, marking the lowest cost of borrowing in over two years.
This reduction, from a previous 4.25%, represents the fifth cut since August of last year. Policymakers at the Bank reached the decision by a narrow margin, requiring two rounds of voting.
While lower rates may ease monthly mortgage payments for some homeowners, they could also result in diminished returns for savers.
The unusual second vote underscores the delicate balance in considering further rate cuts, given concerns about rising prices. However, the Bank’s governor indicated to the BBC that the overall trajectory for rates remains “downwards.”
Inflation is now projected to peak at 4% in September, according to the Bank’s Monetary Policy Report. This figure is double the Bank’s target rate and exceeds the 3.8% forecast in its May report.
Although inflation remains above the Bank’s preferred level—ordinarily discouraging rate cuts—economic growth has been sluggish, accompanied by anxieties surrounding the employment sector.
Bank of England Governor Andrew Bailey described the decision to cut interest rates as “finely balanced.”
“Interest rates are still on a downward path,” he stated. “However, any future rate reductions will need to be implemented gradually and with caution.”
Speaking to the BBC, he acknowledged that the course of future rate cuts “is a bit more uncertain frankly.”
Businesses informed the Bank that “material increases” in National Insurance Contributions and the national living wage since April have cumulatively added 2% to food prices.
The Bank also noted that adverse global weather conditions have driven up the cost of commodities such as beef, coffee beans, and cocoa.
Companies reported to the Bank that they anticipate UK labor costs “to continue to push up food prices in the second half of the year,” leading to staff reductions to mitigate expenses.
They further indicated that shoppers are “trading down” by opting for own-label products over branded items and purchasing “cheaper cuts of meat.”
Mr. Bailey told the BBC that the Bank does not expect higher inflation to persist, “but we have to watch this very carefully.”
Conversely, UK employment is “softening,” he noted, citing data indicating a continued decline in job vacancies and a slowdown in wage growth.
Mr. Bailey emphasized that he is “very conscious” of the impact of inflation on the cost of living.
“Food is a particularly important issue here because for those on the lowest incomes, food [is] a larger share of their consumption because it is the essential of life so we have to be very focused on this,” he said.
At 4%, interest rates are now at their lowest level since March 2023. This will benefit some mortgage-holders and borrowers, but it is likely to mean smaller returns for savers.
Individuals with tracker mortgages, which fluctuate with the Bank’s base rate, should experience an immediate decrease in monthly payments. Approximately 600,000 people hold such mortgages.
According to financial information company Moneyfacts, the latest rate cut translates to a £40 per month reduction in repayments on an average standard variable rate mortgage of £250,000 over 25 years.
However, many homeowners are facing the need to remortgage this year at rates higher than those secured several years ago.
Adam Christie recently had to re-fix his mortgage rate, transitioning from a five-year fixed term with a 1.8% interest rate to a two-year term with a 3.8% rate.
“It was quite a significant jump, but not as much as we were fearing,” he tells the BBC.
He had anticipated an increase of £200-300 per month but instead, his repayments have risen by about £100.
While he describes this as “the best of a bad situation,” he acknowledges ongoing uncertainty about the future.
“We are still a little bit anxious about the future and what it might hold. They might go up again… but I suppose only time can tell,” he says.
The Bank’s nine-member Monetary Policy Committee was divided on the decision to cut rates. Four members favored a cut, four preferred to hold, and one—Alan Taylor—advocated for a steeper reduction in borrowing costs.
While some economists had anticipated a further interest rate cut at the Bank’s November meeting, the closeness of the latest vote has led some analysts to question the likelihood of such a move.
“Bank of England policymakers are still playing a highly cautious hand,” said Susannah Streeter, head of money and markets at Hargreaves Lansdown.
“Although the Bank has opted for a cut, the chances of another reduction by the end of the year have receded sharply,” she added.
Ruth Gregory, deputy chief executive at Capital Economics, stated that the Bank “appears in no rush to cut again.”
She suggested that the policymakers’ assessment of risks to the economy “raises the chances that the Bank will skip a cut later this year.”
Chancellor Rachel Reeves described the drop as “welcome news, helping bring down the cost of mortgages and loans for families and businesses.”
However, shadow chancellor Mel Stride said interest rates “should be falling faster,” adding: “Rates are only coming down now to support the weak economy Rachel Reeves has created.”
Liberal Democrat Treasury spokesperson Daisy Cooper asserted that the cut “would have happened months ago if the government was not acting as a roadblock to growth.”
The Bank now projects that GDP figures for the April-to-June quarter, scheduled for release next week, will indicate a sharp slowdown to just 0.1% growth.
This contrasts with a 0.7% expansion in the first three months of the year.
It also noted that the impact of US tariffs on the UK is not anticipated to be as significant as previously estimated in May.
However, tariffs are still expected to reduce economic growth by approximately 0.2%.
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Changes to the Bank’s base rate can affect mortgage and savings rates.
Rates are now at their lowest since March 2023 even though inflation is well above target.
The Chancellor Rachel Reeves is due to deliver her Budget in the autumn.
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New figures reveal a sharp drop in hospitality vacancies, with local businesses feeling the strain.
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