Base Rate Cut

Last month the Bank of England lowered interest rates to 4% following a knife-edge vote but borrowers hoping for immediate mortgage relief may want to temper their expectations.

Announced after an unusually divided Monetary Policy Committee (MPC) meeting the latest 0.25 percentage point cut marked the fifth reduction in a year and brings the base rate to its lowest level since February 2023.

Yet the decision was far from unanimous and took an unprecedented second round of voting to break the deadlock.

Four members of the MPC wanted to keep rates on hold. Another four opted for the now-delivered 0.25-point reduction. But it was the ninth member, who had pushed for a bolder 0.5-point cut, who tipped the balance during a second round of voting, resulting in a narrow 5-4 win for the so-called doves.

DIVIDED HOUSE

The split reflects deep divisions over how the Bank should be steering the economy as the year begins to draw to a close.

On one side, members are increasingly concerned by a gloomy economic outlook such as slowing GDP growth and rising unemployment. On the other, inflation remains stubbornly high, with the Consumer Price Index (CPI) expected to rise again to 4% in September, well above the Bank’s 2% target.

For the four members who voted to hold rates, last month’s inflation figures were too alarming to ignore. At 3.6% and climbing, they argue the battle against rising prices is far from won.

But the doves on the committee prevailed and with the base rate now falling borrowers may reasonably ask: does this mean cheaper mortgage rates?

MORTGAGE RATES

The short answer? Not just yet. Much of the financial world and particularly the swaps market, which influences the pricing of fixed-rate mortgages, had already priced in the cut. So, while the direction of travel is now confirmed don’t expect a flood of cheaper deals to suddenly appear.

Still, there is a sense of momentum now and the cut sends a clear signal that the Bank of England is now more focused on slowing growth and rising unemployment than the threat posed by inflation.

That shift in sentiment is significant as it underpins growing market confidence that mortgage rates will continue to fall – slowly but steadily – through the rest of the year.

And if current trends persist, some experts reckon we could see sub-3.5% mortgage rates by Christmas – bringing real relief to millions of households due to refinance in late 2025 and early 2026.

FRUSTRATION

“The rate cut will be welcomed, but it’s slow progress for an economy that’s in desperate need of a kickstart,” Paul Noble, Chief Executive of Chetwood Bank, said.

“Domestically and globally, the economy has taken a beating over the last year, but a trade deal secured with the US is one factor that has started to ignite some flickers of hope and likely prompted the MPC to continue to ease off on the brakes.

“However, inflation remains above target, and many will argue that the MPC should have not only acted sooner but acted more decisively too. After all, leadership isn’t just about reacting when conditions are safe – it’s about shaping the path forward.”

And he added: “Caution has been the watchword on Threadneedle Street for a long time now, with rates slow to go up when inflation began to skyrocket and then slow to come down with inflation more settled.

“What was really needed was bolder action to catalyse the economy and really create growth, rather than more tentative tiptoeing.”

WHAT IT MEANS FOR YOU

If you’re on a tracker mortgage, which moves in line with the base rate, you’ll feel the impact quickly. A 0.25 percentage point cut will knock around £15-£20 per month off the average mortgage, depending on loan size.

If you’re on a fixed rate, however – as around 85% of UK borrowers are – the picture is more complex. Your current deal won’t change, and any reduction in rates when you remortgage may be marginal in the short term.

That’s because mortgage lenders set their fixed-rate products based on swap rates – which anticipate where interest rates will be in the future. Since these markets had already forecast this cut, most of the movement is already accounted for.

If your fixed deal is coming to an end in the next six to nine months, start shopping around early. Lenders are competing hard for business and while dramatic price drops aren’t imminent there may be marginal gains to lock in now with many mortgages offers valid for six months.

And do keep in mind that rate cuts may not come in a straight line – the narrowness of the vote shows just how fragile the outlook remains.

As always, stay alert, watch the inflation numbers and be ready to act when the market shifts more decisively.

Remember, smart choices start with expert advice – always speak to your mortgage adviser to get the best for your financial future.

Your home may be repossessed if you do not keep up repayments on your mortgage the information contained within was correct at the time of publication but is subject to change.