Bank of England Cuts Interest Rates for the First Time Since the Start of the Pandemic
In a move welcomed by many, the Bank of England has announced a cut in interest rates, the first since the beginning of the COVID-19 pandemic. The decision comes after 14 consecutive rate hikes since December 2021, as the Bank tried to control rising inflation caused by the COVID recovery and further exacerbated by Russia’s invasion of Ukraine.
While the rate cut is good news for borrowers, experts warn that it will still be a tough journey to reach more comfortable borrowing cost levels. The restrictive nature of the cut, from 5.25% to 5%, is aimed at combatting stubborn elements of inflation, particularly in the services sector.
The reduction in Bank rate will immediately benefit hundreds of thousands of households with tracker or floating mortgage products. These mortgages are tied to the Bank rate and will see a decrease in monthly payments, with an average of £17 for a £125,000 mortgage over 25 years. Some lenders may also choose to pass on the reduction to their Standard Variable Rate (SVR) mortgage customers, although this is not mandatory.
Coventry Building Society has already announced that it will cut all variable mortgage rates by a quarter point, effective from September 1. Similarly, Santander has confirmed that its SVR customers will also benefit from the rate cut.
Those in the market for a new fixed rate deal may also see a slight decrease in rates, as major lenders have been adjusting their offerings in anticipation of the Bank’s decision. However, experts caution that the extent of this decrease will depend on the level of competition in the mortgage market and the timing of the next rate cut, currently expected in December.
On the other hand, there may be some losers in this situation. Not all SVR mortgage customers will see a decrease in their rates, and it is advisable for individuals to check with their savings account provider for any updates. In the past, banks and building societies have been accused of being slow to increase savings rates in line with interest rate hikes, but they may be quicker to decrease them now. However, the impact of the rate cut is expected to be minimal compared to the speed at which the Bank has raised rates in the past.
For households who have recently secured a new fixed rate deal, the news may not be as positive. They will have to endure the higher rate until the term expires, with penalties for early exit likely not worth it. However, the rate should be lower when it comes time to renew the deal, barring any unexpected global events.
For renters, the interest rate cut may not have an immediate impact unless their landlord takes out a new loan.
The main purpose of the Bank’s decision to cut interest rates is to loosen its grip on economic activity. However, this move has raised concerns that consumers and businesses may take it as a signal to increase their spending, which could lead to inflation. The housing market, in particular, has been struggling due to high interest rates, and experts expect this cut to have a positive impact on home-mover sentiment for the upcoming autumn selling season.
Tim Bannister, property expert at Rightmove, believes that the rate cut will not immediately lead to a surge in activity, as mortgage rates are still high and are not expected to decrease significantly in the short term. However, it is likely to boost home-mover sentiment, which bodes well for the housing market.
Tom Hopkins, senior portfolio manager at BRI Wealth Management, believes that despite the small 25 basis point cut, it will have a significant effect on UK sentiment. Lower mortgage repayments will make consumers feel more positive, and on the financial markets, there have already been rallies in sectors that are sensitive to interest rates, such as retail and property. This rate cut has removed the uncertainty that has been looming over these sectors for the past two years.
