UK interest rates cut to 4.75% but Bank hints fewer falls to come

Interest rates in the UK might take more time to drop again, following the Bank of England's prediction that inflation is likely to rise after the Budget unveiled last week.

The Bank reduced interest rates from 5% to 4.75%, a decision that many had anticipated.

However, it suggested that although the additional expenditures mentioned in the Budget would provide a temporary increase in growth, actions like increasing the limit on bus fares and imposing VAT on private school fees would lead to quicker price hikes.

Bank governor Andrew Bailey indicated that interest rates are expected to decrease slowly from this point forward. However, he warned that any reductions shouldn't happen too rapidly or be too significant.

"The journey ahead leads us downward. We'll find out just how steep and fast it will be. I want to stress that this process will be gradual, mainly because there are numerous risks both globally and within our own country," he shared with the BBC.

Investors currently don't anticipate any more interest rate reductions for the remainder of the year, as the Bank is expected to keep rates steady at its upcoming meeting in December.

Paul Dales, an economist at Capital Economics, has adjusted his forecast and now believes that interest rates will decrease more gradually, reaching 3.5% in early 2026 instead of dropping to 3%.

Inflation, which tracks how quickly prices are increasing, dropped below the Bank's 2% target in September. However, it was anticipated that it would go back up again after the recent hike in gas and electricity prices.

It was previously predicted that the figure would fall to 2% by 2026, but the Bank now anticipates this will occur one year earlier.

The committee responsible for setting the bank's rates, known as the Monetary Policy Committee, decided on a vote of 8 to 1 to approve the reduction.

Catherine Mann chose to maintain the current interest rates, referring to the effect of the Budget on inflation as one of her reasons for this decision.

"The Bank of England has made another reduction, likely as a final move before pausing its actions for a period to see how things unfold," commented Sarah Coles, who leads personal finance at Hargreaves Lansdown.

"Increased borrowing in the budget, a boost in the national living wage, and higher contributions to National Insurance from employers have raised worries that inflation might come back in an unwanted way," she noted.

Considering this, Ms. Coles mentioned that the Bank is cautious about lowering interest rates any further.

The slower rate of interest rate reductions is good for savers and individuals looking for annuities, but it's not great for people with mortgage loans.

The interest rate set by the Bank plays a significant role in determining the fees that High Street banks and other lenders impose on customers for loans and credit cards.

Over a million mortgage borrowers with tracker and variable rates are expected to experience a prompt reduction in their monthly payments.

Nevertheless, mortgage rates remain significantly elevated compared to levels seen for most of the last ten years.

According to the financial information provider Moneyfacts, the typical rate for a two-year fixed mortgage is 5.4%. Meanwhile, the average rate for a five-year fixed mortgage stands at 5.11%.

The recent decrease in interest rates suggests that those saving money may face lower returns from banks and building societies. Right now, the average interest rate for a flexible savings account is approximately 3% annually.

Chancellor Rachel Reeves stated, "The reduction in interest rates today is good news for countless families, but I understand the significant challenges households are facing due to the previous government's mini-budget."

"The initial Budget from this government outlines our commitment to making long-term choices aimed at strengthening the fundamentals."

Shadow Chancellor Mel Stride stated that the reduction in rates would be appreciated by homeowners and that it "continues the efforts made by the Conservatives while in power to keep inflation in check."

"Nonetheless, the independent Office for Budget Responsibility and the Bank of England indicated that due to the decisions made by Labour in last week's Budget, inflation is expected to rise," he stated.

"Rate Cuts Impact Our Savings"

Claire Hopwood and Gavin Laking

Claire Hopwood and Gavin Laking have been regularly tapping into their savings accounts as they prepare for the purchase of their new home.

Gavin expresses his annoyance at how swiftly reductions in interest rates can impact their savings.

"We were experiencing a 4.5% interest rate on one of our accounts, but it has recently decreased to 3.9%."

Claire mentions that the increased interest rates have been beneficial: "It provides a cushion for unexpected situations. That's pretty much all you can do."

In the budget released last week, there were proposals to increase borrowing by £28 billion annually and introduce tax increases amounting to £40 billion.

The most significant change is a rise in National Insurance Contributions that employers will have to pay.

Companies are anticipated to transfer the burden of increased National Insurance expenses to consumers by hiking their prices.

This might lead to a more gradual increase in employees' salaries.

The Bank has updated its growth predictions for 2025 and indicated that the unemployment rate might drop significantly from 4.7% to 4.1%.

What Are My Savings Choices?

You can find a helpful guide on various savings accounts and important considerations on the MoneyHelper website, which is backed by the government and operates independently.

Understanding Interest Rates: A Brief Overview.