Introduction to Interest Rate Cuts
The Bank of England has cut interest rates to 3.75%, marking the lowest level since early 2023. In a tight decision, rate-setters at the Bank opted to cut rates for the fourth time this year. It comes amid a backdrop of slowing inflation and tepid growth in the UK economy.
What Happened to Interest Rates?
The Bank of England’s Monetary Policy Committee (MPC) reduced the base interest rate by 0.25 percentage points, to 3.75%. The nine-member committee voted five to four in favour of the cut. Five members – Andrew Bailey, Sarah Breeden, Swati Dhingra, Dave Ramsden and Alan Taylor – voted for the reduction. Meanwhile, four – Megan Greene, Clare Lombardelli, Catherine Mann and Huw Pill – preferred to keep rates at 4%. The reduction was the sixth time interest rates have been cut since the start of last year, coming down from a peak of 5.25%.
What Does it Mean?
The base rate helps dictate how expensive it is to take out a mortgage or a loan. Many lenders have been chopping rates in recent months in expectation of the Bank of England lowering its base rate. Mortgage borrowers therefore typically seek a reduction in interest rates in order to help bring down variable rates, or to allow for lower mortgage rates when they next remortgage. However, savings rates are also linked to the interest rate and will be reduced in the coming weeks.
Impact on Inflation
Raising interest rates is the central bank’s main way of reducing inflation – the measure of how fast prices increase over time. The UK’s main measure of inflation, CPI (Consumer Prices Index), was reported at 3.2% in November after a dip in food prices. A lower level of inflation typically reduces the need for interest rates to remain at elevated levels. On Thursday, Bank of England rate-setters said inflation is “now expected to fall back more quickly” from April next year, indicating it could move close to the Bank’s 2% target rate.
Economic Growth and the Government’s Role
Interest rates are also often cut in a bid to help stimulate economic growth, with high rates sometimes weighing on investment and spending. UK gross domestic product (GDP) grew by 0.1% in the third quarter of the year and is on track to be flat for the final quarter. The MPC’s report also highlighted “building slack in the labour market”, while pay growth is also set to ease further. The Government’s measures from last month’s Budget will help bring down inflation quicker than previously thought. Budget measures are likely to lower CPI inflation by around 0.5 percentage points, according to the MPC.
Future Interest Rate Cuts
Bank of England governor Andrew Bailey indicated on Thursday that rates are still on a downward trajectory and that the Bank could cut them further. However, he also suggested that decisions by the Bank are becoming “closer” after recent reductions to borrowing costs. Economists still expect at least one more cut before the interest rate steadies, although some have pointed towards two. Rob Wood, chief UK economist at Pantheon Macroeconomics, predicted another reduction in April next year.
Conclusion
The cut in interest rates is a significant move by the Bank of England, aiming to stimulate economic growth and reduce inflation. While it may bring benefits to mortgage borrowers, it also means lower savings rates for those with savings accounts. The future of interest rates remains uncertain, with the Bank of England suggesting that further cuts are possible. As the UK economy continues to navigate through challenging times, the decision to cut interest rates will be closely watched by economists, policymakers, and the general public alike.
