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

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Interest rates have been lowered for the second time this year by 0.25%. However, mortgage rates are expected to increase, which is disappointing news for homeowners.

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

Governor Andrew Bailey mentioned that interest rates are expected to "gradually decrease from this point onward," but he cautioned against making cuts that are "too rapid or excessive."

However, the Bank's Monetary Policy Committee (MPC) predicted that Rachel Reeves's initial budget as chancellor could increase inflation by as much as half a percentage point over the next two years. This would lead to a slower decrease in interest rates than was initially expected.

The committee stated that actions like increasing the maximum bus fare and the VAT on 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-rate mortgages and savings rates increased this week and are likely to climb even more in the upcoming weeks.

Lenders 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%. Similarly, the average rate for five-year fixed mortgages has increased from 5.09% to 5.13%.

However, the best rates currently available haven't increased yet, so borrowers who can secure a fixed rate are encouraged to do so promptly.

Savings rates have also seen a minor increase for one-, three-, and five-year fixed-rate bonds. This rise can be attributed to the increase in bank swap rates, which are the costs lenders incur when borrowing from financial institutions, as they prepared for the upcoming Budget.

At the same time, anticipated increases in taxes and government spending are projected to enhance economic growth by 0.75 percentage points at its highest point a year from now, compared to earlier estimates released in August.

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

This indicates that inflation is now expected to hit the Bank's target of 2 percent by the second quarter of 2027, which is a delay of one year from earlier forecasts.

Recent official statistics revealed that the Consumer Price Index (CPI) inflation dropped to 1.7 percent in September, a significant decrease from the peak of 11.1 percent recorded in 2022, which was the highest level in 41 years.

The decrease in inflation, which was at 2.2 percent in August, was mainly caused by a significant drop in fuel costs and reduced airline ticket prices.

Mr. Bailey mentioned that the drop in inflation below the 2 percent target has allowed policymakers to reduce interest rates to their lowest point since June of the previous year.

According to Suren Thiru, the economics director at the Institute of Chartered Accountants, the notes from the recent Monetary Policy Committee meeting indicate that it is improbable that there will be another rate cut next month.

Mr. Thiru commented, "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 financial period."

The MPC indicated that there is a lot of uncertainty regarding the future of the job market. Starting in April, companies will have to deal with increased national insurance tax costs and a rise in the national minimum wage.

Analysts indicate that monthly tracker mortgage payments are expected to decrease by an average of £28.98 due to the reduction in the base rate.

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