The Bank of England recently announced a reduction in the UK’s base interest rate, lowering it from 4.25% to 4%. That’s the lowest it’s been since March of 2023. It will be tremendously felt in the form of mortgage and savings rates skyrocketing across the country. The decision follows the clamor for action from inflation’s upward thrust. The Consumer Price Index is still at 3.6%—far too high by the Bank’s own target.
The Federal Reserve’s interest rate cut seeks to revive economic activity during a time of increasing expenses across the board. For home owners, this move will reduce repayments for those on standard variable rate mortgages. For instance, a homeowner with a £250,000 mortgage over 25 years can expect monthly repayments to drop by approximately £40.
Though smaller than the impact on lending, the negative base rate is producing important effects in the savings accounts of many households. The average personal savings rate sits right around 3.5%. That’s a drop of 0.42% from this time last year. Analysts are expecting this trend to continue in the very near future. As lenders respond to the new base rate, often the consumer savings rates will be cut even more.
Mortgage rates, especially for long-term fixed-rate mortgages, have been extremely volatile during the last few years. The effective interest rate for five year fixed rate mortgage agreements spiked from 2.66% at the beginning of January 2022. By the end of October 2022, it hit a high of 6.51%. Currently, this average has slowly but surely dropped to 5.01%. In much the same way, two-year fixed mortgage rates have been volatile. They rose from 2.38% in January 2022 to a peak of 6.85% in early August 2023. Since then, they have ranged widely and finally have quieted down to an average of around 5% this month.
Even with the recent cuts, some experts are still worried about whether savings rates. Rachel Springall, a finance expert at comparison site Moneyfacts, said: “First and foremost savings rates are falling. She contends that any cuts to base rates would be a double whammy for savers. This popular lament speaks to the larger anxiety of all those trying to get by on interest income drawn from their savings.
The Bank of England’s decision comes as inflation is proving to be very persistent and well above target. Industry has told the Bank that if conditions persist, they might force food prices even further north. Market volatility and supply chain disruptions amp up the complexity of the economic environment.