The Bank of England is set to announce a potential cut in interest rates from 4.75% to 4.5% this Thursday. This decision comes as inflation levels continue to decrease, with the Consumer Price Index (CPI) marking a notable drop to 2.5% in the 12 months leading up to December 2024. The Bank of England’s base rate is key to influencing the cost of borrowing for other lenders and directly impacts both savers and borrowers across the United Kingdom.
Interest rates play a crucial role in the UK's economic landscape. The Bank of England utilizes these rates to manage inflation, aiming for a target rate of 2%. The base rate has remained above 4% for much of the past year, reflecting efforts to stabilize the economy following a peak inflation rate of 11.1% in October 2022. The current inflation measure, CPI, indicates that inflation has significantly decreased, prompting considerations for rate adjustments.
A reduction in the base rate would directly impact approximately 600,000 homeowners whose mortgages are "tracker" types tied to the Bank of England's rate. A cut of 0.25 percentage points is expected to save these homeowners approximately £29 on their monthly repayments. This change might offer relief amid ongoing financial pressures.
Mortgage rates remain a focal point for many homeowners. The average two-year fixed mortgage rate currently stands at 5.51%, while a five-year fixed mortgage rate is slightly lower at 5.31%. These rates are significant for those with fixed-rate mortgages set to expire, especially as about 800,000 such mortgages with rates of 3% or lower are anticipated to expire annually until the end of 2027.
The impact of interest rates extends beyond mortgages, affecting savings accounts as well. With the current average easy access account offering about 3% annual interest, any adjustment in the Bank of England's base rate will influence savers' returns. As the Bank considers various inflation measures when deciding on rate changes, its decisions have widespread implications for financial institutions and individuals alike.