Interest rates cut for first time in over four years

The Bank of England (BoE) has lowered interest rates to 5%, marking the first reduction since March 2020¹. Governor Andrew Bailey described this move as significant but warned that additional cuts are unlikely soon. The BoE’s primary focus remains on controlling inflation and stabilising the economy.

What is the impact on mortgages and homeowners?

The rate cut immediately relieves homeowners with tracker mortgages, leading to lower monthly payments. Those with variable-rate mortgages will also see a reduction in their repayments. However, homeowners on fixed-rate mortgages may not benefit as much, especially when their deals expire. Since most fixed-rate mortgages will need to be renewed by the end of 2026, many could face higher rates in the future, presenting a potential challenge for those seeking to manage increased costs.

Potential effects on consumer confidence and business activity

The interest rate cut is anticipated to boost consumer confidence, which persistent economic challenges like high inflation and rising living costs have dampened. Small business owners are tentatively hopeful that lower rates will lower their business loan repayments and stimulate increased consumer spending. However, they also recognise that many consumers are still cautious with their spending.

The decision to cut rates was highly debated

The decision to cut rates was narrowly approved by the BoE’s Monetary Policy Committee, reflecting a cautious approach by its leadership. Chief Economist Huw Pill, who voted against the cut, argued that monetary policy should focus on long-term inflation control rather than addressing short-term cost-of-living pressures¹. His stance highlights concerns that reducing rates too quickly might jeopardise efforts to maintain inflation control over the long term.

Political reactions to economic policy were divided

The rate cut has sparked significant political debate. Labour’s Shadow Chancellor, Rachel Reeves, welcomed the reduction but criticised previous government policies for worsening current economic challenges, particularly the high mortgage rates many households are facing¹. In contrast, former Prime Minister Rishi Sunak warned that recent increases in public sector pay could complicate efforts to control inflation and might limit the BoE’s ability to justify further rate cuts in the future¹.

Balancing inflation and economic recovery

Despite the recent rate cut providing some immediate relief, the UK's economic outlook remains uncertain. Inflation remains a pressing issue and the possibility of future mortgage rate increases adds to the complexity. The BoE’s cautious stance highlights the ongoing difficulties in achieving long-term economic stability. Moving forward, managing both inflation and economic growth will require careful and strategic efforts as the BoE contends with these challenging conditions.

Sources

1.    https://www.bbc.co.uk/news/articles/cx72dpxy25do

All the information in this article is correct as of the date of publishing. The opinions expressed in this publication are those of the authors Euxton Mortgage Market. The information provided in this article, including text, graphics and images does not, and is not intended to, substitute advice; instead, all information, content and materials available in this article are for general informational purposes only. Information in this article may not constitute the most up-to-date legal or other information.

YOUR HOME MAY BE REPOSSESSED IF YOU DO NOT KEEP UP REPAYMENTS ON YOUR MORTGAGE.

August 2024