The Bank of England (BoE) has lowered its interest rate to 4.5%, the lowest level in nearly two years, providing relief to mortgage holders in the UK. This marks the third reduction in borrowing costs in the current cycle, following cuts in August and November of the previous year.
The decision was made by the Bank’s Monetary Policy Committee (MPC) with a 7-2 vote, influenced by December’s inflation rate falling to 2.5%, closer to the BoE’s 2% target. Two policymakers, Swati Dhingra and unexpectedly, Catherine Mann, favored a more aggressive half-percentage-point reduction, but were outvoted.
BoE Governor Andrew Bailey emphasized a “gradual and careful approach” to future rate cuts, stating that the MPC anticipates further reductions as disinflation continues. However, he cautioned about potential economic uncertainties ahead.
The BoE also significantly revised its UK growth forecast for the year, predicting a mere 0.75% increase in GDP, half of its November projection. This downward revision drew criticism from Chancellor Rachel Reeves, who expressed dissatisfaction with the current growth level.
This base rate reduction directly impacts mortgage rates, particularly tracker mortgages that adjust in line with the base rate. Approximately 600,000 UK homeowners hold tracker mortgages, potentially benefiting from lower monthly repayments. UK Finance estimates a 0.25 percentage point cut could save around £29 on an average monthly tracker mortgage payment. However, these savings only partially offset the substantial cost increases from previous rate hikes.
While fixed-rate mortgage holders won’t see immediate changes, Sarah Coles, a Yahoo Finance UK columnist, noted that the rate cut is already factored into the market. Moneyfacts data indicates a slight decrease in average two-year fixed rates but an increase in average five-year fixed rates.
For savers, the rate cut may translate to lower returns on savings accounts. Mark Hicks of Hargreaves Lansdown anticipates pressure on easy access savings rates, while fixed-term accounts might remain relatively stable. Despite the cut, the cash ISA market remains competitive, with some providers offering rates around 5%.
The rate cut has had minimal impact on annuities, which remain strong. Helen Morrissey, a Yahoo Finance UK columnist, observed that annuities are performing well despite the anticipated rate reduction. A £100,000 pension at age 65 could currently yield up to £7,492 annually from a single-life level annuity with a five-year guarantee.
Globally, the US Federal Reserve maintained its interest rate in the 4.25%-4.50% range, pausing after three consecutive cuts. The European Central Bank (ECB) cut its interest rate by a quarter-point to 2.75%, its lowest since early 2023, following a similar move in December. The ECB lowered borrowing costs four times in the previous year, and market expectations suggest four more cuts in 2025.
