The Bank of England has this lunchtime reduced interest rates for the first time since the start of the Covid pandemic, dropping its core base rate by 0.25% from 5.25% to 5.0%.
Interest rates had previously risen steadily, doing so on 14 separate occasions from 0.1% in October 2021 to 5.25% in the spring of 2023, a level at which they had previously remained for over a year.
This lunchtime’s announcement was believed to be in the balance and in the end the Bank’s Monetary Policy Committee (MPC) voted narrowly by 5 votes to 4 for a rate cut. The Bank’s Governor, Andrew Bailey, cast the deciding vote for an interest rate cut.
As part of today’s announcement the Bank of England has also raised its annual growth forecast for the UK economy from 0.5% to 1.25%.
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Today’s announcement will be welcomed by mortgage holders, with some 560,000 UK households said to be set to refinance a fixed mortgage between now and the end of 2024. For the 1.2 million UK households who currently have a ‘tracker’ mortgage, today’s announcement will equate to an average saving of just under £400 per year.
Reacting to the Bank’s decision, the new Chancellor of the Exchequer, Rachel Reeves commented, “The cut in interest rates will be welcome news, but millions are still facing higher mortgage rates after the disastrous mini-budget”.
The former Chancellor, and now Shadow Chancellor, Jeremy Hunt also welcomed today’s announcement. Suggesting that the new Labour government had inherited an economy that was on ‘the right track’, Mr Hunt said, “In government, we took difficult decisions that cut inflation from 11.1 per cent to the Bank’s target 2.0 per cent, paving the way for lower rates”.
With two thirds of sitting Conservative MPs having been defeated in last month’s general election, this apparent change in the trajectory of the UK economy, is likely to lead some to further question Rishi Sunak’s decision to call this year’s electoral contest as early as he did.
The Building Societies Association (BSA) has welcomed today’s move stating, “Today’s cut in Bank Rate marks a turning point in what has been a very difficult two and half years”.
Speaking on behalf of the BSA, Paul Broadhead, Head of Mortgage and Housing Policy, said, “The news will be welcomed by many homeowners and aspiring first-time homebuyers. Whilst a 0.25% cut in the rate to 5%, will not have a significant impact on the overall cost of mortgage payments, it is likely to boost to consumer confidence and lead to an increase in housing market activity”.
The General Secretary of the Trade Union Congress, Paul Nowak also welcomed today’s move, saying, “This rate cut will give relief to millions of families and businesses – and needs to be the first of many”.
The extent to which interest rates now embark on a fast downward trajectory does though appear uncertain, with the CBIs deputy chief economist, Alpesh Paleja warning, “At best, there is only mixed evidence that inflation persistence has been defeated. While the labour market is loosening and wage growth slowly easing, the unexpected strength in services inflation remains a red flag”
The minutes of the previous MPC meeting had expressed concern that this April’s increase in the National Living Wage was creating cost pressures for some businesses. Greg’s the bakery chain has already commented that cost pressures were causing it to raise its prices with the chain increasing the price of its sausage roll by 5p earlier this week.
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