Introduction to Interest Rates
The Bank of England has cut interest rates to 4%, taking the cost of borrowing to the lowest level for more than two years. This cut, from the previous rate of 4.25%, is the fifth since August last year. The decision was narrowly backed by the Bank’s policymakers, who took two votes to reach a decision.
Impact on Homeowners and Savers
Lower rates will reduce monthly mortgage costs for some homeowners but could also mean smaller returns for savers. People with tracker mortgages should see an immediate reduction in monthly repayments. However, there are many homeowners who are having to remortgage this year at rates higher than deals they struck several years ago.
Inflation and the Economy
Inflation is now expected to peak at 4% in September, the Bank said in its Monetary Policy Report. That is twice the Bank’s target rate and above the 3.8% rate it predicted in its May report. Businesses told the Bank that "material increases" in National Insurance Contributions and the national living wage since April have added up to 2% to food prices. The Bank said global adverse weather conditions had also lifted the cost of goods such as beef, coffee beans, and cocoa.
Effect on Mortgage Repayments
The latest cut in rates means repayments on an average standard variable rate mortgage of £250,000 over 25 years will fall by £40 per month, according to financial information company Moneyfacts. Adam Christie has just had to re-fix his mortgage rate – moving from a five-year fixed term with a 1.8% interest rate, to a two-year term with a rate of 3.8%. He had been prepared for a £200-300 per month increase – but instead, his repayments have risen by about £100.
Government Reaction
Chancellor Rachel Reeves said the drop was "welcome news, helping bring down the cost of mortgages and loans for families and businesses". However, shadow chancellor Mel Stride said interest rates "should be falling faster", adding: "Rates are only coming down now to support the weak economy Rachel Reeves has created." Liberal Democrat Treasury spokesperson Daisy Cooper said the cut "would have happened months ago if the government was not acting as a roadblock to growth".
Economic Growth
The Bank now forecasts that GDP figures for the April-to-June quarter, due to be published next week, will show a sharp slowdown to just 0.1% growth. That compares to 0.7% expansion in the first three months of this year. The impact of US tariffs on the UK is not expected to be as much as it thought back in May. However, tariffs are expected to dent economic growth to the tune of 0.2%.
Conclusion
In conclusion, the Bank of England’s decision to cut interest rates to 4% will have a significant impact on the economy, homeowners, and savers. While lower rates will reduce monthly mortgage costs for some homeowners, they could also mean smaller returns for savers. The Bank’s forecast of a sharp slowdown in economic growth and the impact of US tariffs on the UK economy are also causes for concern. As the economy continues to evolve, it is essential to monitor the effects of the interest rate cut and adjust policies accordingly to support economic growth and stability.
