The Bank of England is widely anticipated to announce a reduction in interest rates on Thursday, with a potential drop from 4.5% to 4.25%. Analysts suggest that further cuts could follow later in the year as the UK faces increasing economic pressures. While some experts predict a reduction, a more substantial cut or no change remains possible. The official announcement is scheduled for 12:02 BST, following a two-minute silence to commemorate VE Day.
This anticipated rate cut would mark the fourth reduction since the peak of 5.25% last year and the second this year. The Bank of England’s Monetary Policy Committee (MPC) is carefully assessing inflation data, which stood at 2.6% in the 12 months to March. However, with recent hikes in domestic energy prices and other bills, inflation is expected to rise in the short term. The primary objective of the MPC is to maintain inflation close to the 2% target.
The MPC is also keeping a close watch on global economic instability, particularly stemming from the US tariff policy under President Trump. Trade tensions and uncertainties could potentially hinder economic growth and drive inflation lower, increasing the likelihood of further rate cuts later in the year.
If the interest rate cut is confirmed, it will likely affect mortgage rates, loan repayments, and credit costs. Approximately 80% of UK homeowners with a mortgage are on fixed-rate deals. For them, the impact will only be felt when they refinance or take out a new mortgage. Currently, the average two-year fixed mortgage rate is 5.15%, while the average five-year deal stands at 5.08%.
Lenders have already started adjusting fixed mortgage rates in anticipation of the Bank of England’s decision. However, these rates are not expected to drop to the historically low levels seen in the 2010s. Additionally, tracker mortgage holders – nearly 600,000 homeowners – could see immediate reductions in their repayments, with a 0.25% cut potentially saving them around £29 per month, according to UK Finance.
While a rate cut could ease borrowing costs, it is less favorable for savers. Interest on savings accounts is likely to decrease, especially for instant-access accounts. According to Anna Bowes, a savings expert at The Private Office, some fixed savings rates remain competitive, but they require committing funds for one to five years.
For those like Samren Reddy, a medical student at the University of Liverpool, the prospect of lower savings returns could hinder efforts to accumulate a home deposit. Despite potentially lower borrowing costs, the pressures of everyday expenses and rising living costs may offset any financial gains from the rate cut.
For homeowners like Vanda, who is on a tracker mortgage, a rate cut could provide some much-needed financial relief. "I had a really good rate, then all of a sudden it changed, and I got caught out," she said. "A drop would help because I’ve just been made redundant. It would help a wee bit, but I don’t think it will ever go back to the way it was."
Those on standard variable rate mortgages will have to wait for their lenders to decide on any changes to their mortgage rates, as these are not directly linked to the Bank of England’s base rate.
The Bank of England’s potential interest rate cut is a significant move aimed at stabilizing the UK economy amid global trade uncertainties and rising living costs. While borrowers could benefit from reduced borrowing costs, savers may face lower returns. With further cuts potentially on the horizon, all eyes are on the MPC’s upcoming decisions and their broader implications for the UK economy.
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