Introduction to Interest Rate Cuts
Economists believe that the Bank of England will lower interest rates to 4% on August 7, when it announces the outcome of its next Monetary Policy Committee (MPC) meeting. This decision comes after the Bank’s vote to hold interest rates at 4.25% in June, which was more divided than expected, with a 6-3 majority. Dave Ramsden unexpectedly joined Swati Dhingra and Alan Taylor in calling for a faster pace of monetary policy easing, likely influenced by signs that the labor market is cooling.
The Cooling Labor Market
Although wage growth remains high, it slowed to 5.2% annually between February and April, down from 5.6% previously. The unemployment rate also increased to 4.6% over this period, the highest level in almost four years, while the number of job vacancies dropped by 63,000 over the quarter. Some firms are not recruiting new workers or replacing those who have left due to weakening business confidence.
Economic Growth Challenges
Economic growth has become more challenging, with GDP slumping by 0.3% in April due to higher business taxes and trade disruptions. This could prompt the Bank of England to continue its quarterly pace of rate cuts for the rest of 2025. James Smith, a UK economist at financial institution ING, believes that the backdrop is becoming more favorable for interest rate cuts, citing services inflation and wage growth as key factors.
Forecasting Interest Rate Cuts
Not all economists agree on the pace of future interest rate cuts. Research provider Pantheon Macroeconomics expects one more cut this year, bringing the base rate to 4%, while traders are betting on two more cuts. Deutsche Bank thinks there will be three more cuts, coming in August, November, and December, which would bring the base rate to 3.5%. The MPC has stated that it will continue its "gradual and careful" approach to interest rate cuts, but some members, including external MPC member Alan Taylor, are more dovish and advocate for faster rate cuts to protect the economy’s chances of achieving a "soft landing."
Impact on Mortgages
Falling interest rates generally translate to cheaper mortgages. The average two-year fixed-rate mortgage deal is currently 5.06%, while the average five-year deal is 5.05%. Although recent drops may bring little comfort to those coming off relatively cheap five-year deals agreed before rates started rising in 2021, further base rate cuts could provide some relief. Around 1.6 million fixed-rate deals are due to come to an end in 2025, and those who are about to come off their previous deal may be hoping for further base rate cuts.
Impact on Savings
Some of the top savings deals have disappeared over the past 18 months, and savings rates are likely to fall further over the coming months. If you are happy to lock up your cash for a year or so, it could make sense to fix your savings to lock in higher rates for longer. The top one-year fixed account with no minimum deposit requirement currently offers 4.55%, according to Moneyfacts. While some easy-access accounts currently offer higher rates, they could drop shortly after you open the account.
Conclusion
In conclusion, the Bank of England’s decision to cut interest rates to 4% is expected to have a significant impact on the economy, particularly on mortgages and savings. As the labor market cools and economic growth becomes more challenging, the MPC’s approach to interest rate cuts will be crucial in determining the outcome. Whether you are a homeowner looking to refinance or a saver trying to make the most of your money, understanding the implications of interest rate cuts is essential in making informed decisions about your financial future.
