Bank of England Poised to Slash Interest Rates
Policymakers at the Bank of England are expected to implement interest rate cuts soon. This decision would reduce the Bank rate to its lowest point since February 2023, decreasing from 4% to 3.75%. This anticipated change marks the sixth reduction in interest rates since August of last year.
Implications of the Interest Rate Cut
The Bank rate significantly affects both borrowing costs for consumers and returns for savers. It serves as a crucial instrument for the Bank’s Monetary Policy Committee (MPC) to manage inflation, which is aimed at a target of 2%.
Recent Inflation Data
The latest inflation report revealed a more considerable decrease in the Consumer Prices Index (CPI) than experts had forecasted. According to the Office for National Statistics (ONS), CPI inflation dropped to 3.2% in November, down from 3.6% in October. This decline continues despite inflation remaining above the Bank’s goal.
As inflation appears to be falling, combined with rising unemployment and a stagnant economy, the MPC is likely to lean towards cutting interest rates. At their last meeting in November, four MPC members voted for a reduction, just missing the majority of five who preferred to maintain the current rates.
Expert Predictions
James Smith, an economist at ING, stated that the significant drop inNovember’s inflation rate suggests it is an ideal time for a rate cut. He projects there may be additional cuts in February and April next year, although this viewpoint is not universally accepted among analysts.
Impact on Homeowners and Savers
Approximately 500,000 homeowners’ mortgages are linked to the Bank of England’s rate. A 0.25 percentage point decrease would likely lower their monthly repayments by approximately £29. Additionally, another 500,000 homeowners on standard variable rates could see their payments average £14 less per month, contingent on lenders passing along the rate cut.
The vast majority of mortgage holders have fixed-rate agreements, and rates on these products have been declining due to anticipated cuts. As of mid-December, the average two-year fixed mortgage rate was 4.82%, while the five-year rate was 4.90%. These reductions could ease financial pressure on landlords and help stabilize rent for tenants.
Effects on Savings Accounts
Conversely, savers are expected to experience a further decline in returns following any decrease in the Bank rate. Currently, the average rate for easy-access savings accounts stands at 2.56%, according to Moneyfacts, indicating a challenging environment for those relying on savings interest.
