The Bank of England’s Monetary Policy Committee voted by a majority of 5-4 to reduce the base rate by quarter of a percentage point in August, from 5.25% to 5% - the first time it has cut interest rates in more than four years.
The last time the base rate was reduced was in March 2020, when it fell to a record low of just 0.10% as the Bank tried to shore up the economy in the face of the coronavirus pandemic. Since then, it has risen steadily, increasing 14 consecutive times beginning in December 2021. It has remained at 5.25% since August last year.
This month’s base rate cut followed Office for National Statistics (ONS) data which showed that the rate at which prices are rising stood at 2% in the 12 months to June, the same as in May, helped by falls in the prices of clothing and footwear.
The Bank of England has an inflation target of 2%, so when it reaches this target and remains stable, there’s more ability for the Bank to cut rates. However, June’s inflation numbers were slightly higher than the 1.9% that economists had forecast, so many had expected that the Committee may wait until September and another round of inflation data before deciding to lower the base rate.
However, cooling wage growth may have persuaded some members of the committee to vote in favour of a cut, despite the fact that total real pay (which takes into account the rising cost of living) rose by 3% on the year in the three months to May.
Bank of England governor, Andrew Bailey, speaking to the BBC, has said that the pressures driving inflation, mainly cheaper energy costs and lower prices of imported goods, have ‘eased enough’ to allow for an easing of the MPC policy.
However, Bailey warns that the Bank of England needs to ensure that inflation doesn’t begin to rise again, reiterating the need to move carefully by not dropping interest rates too quickly or by too much.
What the base rate cut means for you
If you have a fixed rate mortgage, the base rate cut won’t have any immediate impact on your monthly mortgage payments. However, it could mean that you are able to benefit from lower mortgage rates when you come to remortgage.
If you have a tracker mortgage, which follows the Bank of England base rate plus a set percentage, then you will see your tracker rate fall and your monthly payments reduce.
Time will tell whether lenders will reduce their standard variable rates in response to Thursday’s base rate cut – it is up to them to decide how much they’ll trim rates by, if anything. Seek professional advice if you want to know how this month’s rate cut affects your mortgage options, and whether you might be able to save on your current mortgage costs.
