Interest Rate Cut – what does this mean for the market?
The Bank of England (BoE) has announced a reduction in the Base Rate to 5% this month, marking a 0.25% decrease and the first rate cut in four years. Previously, the Base Rate had been held steady at 5.25% since August 2023, following 14 consecutive rate increases. The series of rate hikes was a response to high inflation, which had exceeded 10% in early 2023, far above the government’s target of 2%.
In June, it was announced that inflation had fallen back to the target rate of 2%, a level that was maintained in July. This significant reduction in inflation raised questions about the Bank of England’s next move, with market speculation suggesting an equal likelihood of the Bank either holding the rate steady or implementing a 0.25% cut.
The uncertainty stemmed from persistent high levels of service inflation, which refers to inflation in sectors like hospitality and culture, as opposed to goods inflation, which affects everyday items in a shopping basket.
The Bank of England’s primary goal is to balance inflation control with the health of the wider economy. This rate cut indicates the Bank’s confidence that its strategy for controlling inflation is effective. It also reflects concerns that maintaining the higher rate could negatively impact businesses and households in the future.
In January, an unexpected rise in inflation caused mortgage rates to increase throughout the spring. However, with the positive news of inflation returning to the 2% target over the past few months, mortgage rates have stabilized.
The recent political stability provided by a new government and increased competition among mortgage lenders for new business have accelerated the decline in mortgage rates. Notably, the market has recently seen the reintroduction of mortgage rates below 4% for borrowers with larger deposits, a rate that had not been available for many months. It is anticipated that more lenders will introduce similar competitive rates in the coming weeks.
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