Millions of homeowners were handed a boost today when the Bank of England cut its interest rate from 4.25% to 4%.
But it also warned that inflation could hit 4% in September which will tighten the cost-of-living crisis for millions of households, with food prices in particular rising.
The decision by the Bank’s Monetary Policy Committee (MPC) to shave a quarter point off interest rates will reduce monthly bills by around £50 on a typical London £350,000 tracker mortgage.
For the majority on fixed deals there will be no immediate change but it could open up cheaper loans when they come to remortgage.
The MPC voted by 5 to 4 to reduce rates, a closer than expected result. The four in the minority wanted to hold rates at the current 4.25%. The cut was only approved because one MPC member Alan Taylor changed his vote from a half point to a quarter point to secure a clear majority for a move to 4%.
The Bank also warned that CPI inflation is forecast to peak at 4% in September, up from a previous expected high of 3.5%, and is set to be higher than previously thought over the next two years.
The forecast is a blow to Chancellor Rachel Reeves as the Government is shifting its focus onto raising living standards, as it struggles to get strong economic growth.
She said: “This fifth interest rate cut since the election is welcome news, helping bring down the cost of mortgages and loans for families and businesses.”
But shadow Chancellor Sir Mel Stride stressed: “Rates are coming down to support the weak economy she (Ms Reeves) has created.
“Inflation has almost doubled on her watch and unemployment is rising.”
Today’s cut is the fifth over the past year and brings borrowing costs to their lowest since March 2023.
At that point rates were being raised rapidly to counter a spike in inflation to 40 year highs after the energy price surge triggered by the war in Ukraine.
They peaked at 5.25% in August 2023 and stayed there for a year, inflicting huge pain on homeowners and businesses after a long period of emergency rates below 1% dating back to the financial crisis in 2009.
Today’s move was widely expected in the City and comes after a period of sluggish economic growth and rising unemployment over the first half of the year.
Figures yesterday showed construction activity at its lowest since the pandemic in a major threat to Labour’s pledge to build 1.5 million new homes over the course of the Parliament.
Derrick Dunne, CEO of YOU Asset Management, said: “This cut shows the Monetary Policy Committee chose to hold its nose on persistent inflationary pressures and prioritise the weakening jobs market instead.
“It gives Chancellor Rachel Reeves some reprieve on government borrowing costs, though the cut had been widely anticipated and was largely reflected in government bond markets already. In reality, it will do little to help the maths on the UK’s finances, and the Chancellor still faces some knotty problems ahead of the Budget in October.
“There may be implications for mortgage rates. These had been coming down anyway, but this may continue, giving some much needed breathing space for UK households. At the edges, this may help support the UK’s consumer economy at a time when confidence remains low.
“Nevertheless, it is a marginal win at a time of significant challenges for the UK economy. Inflationary pressures are still evident in food, energy and labour costs. While inflation is expected to drop later in the year, it hit 3.6% in June, significantly ahead of the Bank’s target of 2%. The rate cut is welcome, but is unlikely to shift the dial on the UK economy.
Richard Carter, head of fixed interest research at Quilter Cheviot said: “With today’s cut in interest rates, the fifth in a year, it appears the Bank of England is getting increasingly concerned about the health of the UK economy.
“Unemployment is rising, while growth has ground to a halt once again after what now appears to have been a false dawn in the first quarter. As such, the BoE, while still concerned about its level, is putting inflation fears on the back burner as it looks to provide some relief to businesses and consumers.
“The market hopes the Monetary Policy Committee will pull the trigger again this year, but as the division on the last few decisions shows, even that might be put in doubt with any small change to the data. Today’s vote was on a knife-edge and required a second vote, with one member voting for a bigger rate cut, while four voted for no cut at all. This divergence in views makes interest rate decisions hard to forecast and highlights the difficult position the UK economy is in.”
James Evans, CEO at agents Douglas & Gordon said: “Today’s quarter cut rate is critical to reigniting confidence, especially in the housing market. It is important that rates continue to fall in the near to medium term. This rate cut is a much-needed shot in the arm for the market. Transactions will rise, and I’m confident house prices will follow.”
James Carter, Portfolio Manager at W1M said: “With inflation surprising to the upside and expectations drifting higher, the MPC is unlikely to pre-commit to further easing after today’s cut.
“Assuming further labour market softening, we would still expect cuts in November and February. However, today’s move likely marks the start of a more data-dependent phase, with policymakers watching global events closely and balancing the risk of persistent inflation against a cooling jobs market.
“Clearer data on the impact of tariffs or another bout of global instability could easily tip the Bank’s next decision one way or another.”
