Bank of England cuts interest rates to 4.75% – but mortgages still set to rise

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Interest rates have been reduced for the second time this year, dropping by 0.25%. However, this will still lead to an increase in mortgage rates, posing a challenge for homeowners.

On Thursday, the Bank of England lowered the base rate from 5 percent to 4.75 percent. This change comes after a 0.25 percentage-point decrease in August, marking the first reduction in four years.

Governor Andrew Bailey indicated that interest rates are expected to decrease slowly from this point forward. However, he cautioned that reductions should not happen too fast or be too significant.

However, the Monetary Policy Committee (MPC) of the Bank predicted that Rachel Reeves's inaugural budget as chancellor would raise inflation by as much as half a percentage point over the next two years. This increase would likely lead to a slower reduction in interest rates than what was previously anticipated.

The committee stated that actions like increasing the limit on bus fares and adding VAT to private school fees would lead to a quicker rise in prices.

These actions are expected to raise inflation by 0.3 percentage points in the coming year.

The reduction in the base rate occurred even though fixed mortgage and savings rates have increased this week and are predicted to continue rising in the upcoming weeks.

Banks such as Virgin Money, Halifax, and Coventry Building Society have raised their fixed mortgage rates by as much as 0.25 percentage points. Financial data company Moneyfacts reports that the average rate for two-year fixed mortgages has risen from 5.39% last week to 5.42%. Meanwhile, the average rate for five-year fixed mortgages has increased from 5.09% to 5.13%.

However, the most competitive rates haven’t increased yet, so those who can secure them now are encouraged to act quickly.

Savings rates have seen a small increase for one-, three-, and five-year fixed-rate bonds. This rise is attributed to an uptick in bank swap rates, which are the costs lenders incur when borrowing funds from financial institutions, as they prepare for the upcoming Budget.

At the same time, anticipated increases in taxes and elevated public expenditure are predicted to enhance economic growth by 0.75 percentage points at its highest point in one year, compared to earlier projections made in August.

The Budget is anticipated to raise the Consumer Prices Index (CPI) inflation by nearly 0.5 percentage points towards the end of 2026.

This indicates that inflation is expected to hit the Bank's target of 2 percent by the second quarter of 2027, which is one year later than earlier estimates.

Recent official statistics revealed that the inflation rate in the UK, measured by the Consumer Prices Index (CPI), dropped to 1.7 percent in September. This marks a significant decrease from the 41-year peak of 11.1 percent recorded in 2022.

The decrease in price increases, which fell from 2.2 percent in August, was largely caused by a significant drop in fuel costs and reduced airline ticket prices.

Mr. Bailey mentioned that with inflation dropping below the 2 percent target, decision-makers have been able to reduce interest rates to their lowest point since June of the previous year.

Suren Thiru, the economics director at the Institute of Chartered Accountants, believes that the notes from the recent Monetary Policy Committee meeting indicate that another interest rate reduction next month is improbable.

Mr. Thiru stated, “This reduction in interest rates comes at a perfect time for families facing challenges with their mortgage payments as well as for businesses following a tough budget period.”

The MPC has expressed considerable doubt regarding the future of the job market. They noted that companies will have to deal with an increased national insurance tax and a rise in the national minimum wage starting in April.

Analysts predict that, due to the reduction in the base rate, tracker mortgage payments will decrease by an average of £28.98 per month.

As reported by UK Finance, individuals with a standard variable rate mortgage can expect their monthly payments to decrease by an average of £17.17.