
It has been an exceedingly long period (over four years) since we were last able to state these words: bank rate has been reduced. The Bank of England has decreased rates to 5%, marking the first reduction since March 2020, which is (whisper it quietly) likely to result in more favourable mortgage repayment offers.
The Bank has maintained rates at a 16-year peak of 5.25% since August 2023, in an effort to combat rising prices across the United Kingdom. The last time rates were lowered was during the early days of the coronavirus pandemic, when they were slashed to a record low of 0.1% in an attempt to stimulate the economy.
Whilst this cut on its own may not be a cause for significant jubilation, it does represent the commencement of what most experts believe will be a downward trend. This can only spell good news for mortgage borrowers as we move forward.
Perhaps unsurprisingly, the reduction was accompanied by a considerable degree of caution. Let us delve into the specifics. Firstly, it was a narrow vote in favour. A group of three committee members, led by the Governor of the Bank of England, Andrew Bailey, altered their vote from hold to cut, resulting in a 5-4 majority in favour, compared to a 7-2 vote in June.
The primary division within the rate-setting committee lies between those who believe that with inflation at the Bank's 2% target, it is appropriate to slightly ease the economic pressure, and others who still harbour concerns about enduring inflationary impacts from the recent energy and food price shocks.
Moreover, the unequivocal message today was not to expect a consecutive series of reductions from this point onwards. While there may be potential for a further decrease this year below 5%, possibly in November, the Governor of the Bank of England aims to avoid cutting “too swiftly or excessively.”
Inflation is anticipated to creep back up from the target of 2% over the coming months. Inflation in the service sector - which encompasses entities such as hotels and restaurants - remains elevated, as do wage settlements, although both are beginning to stabilise.
The beast that is inflation is undoubtedly retreating but has not yet been completely consigned to the pages of history.
One rate reduction has been delivered, and further reductions will be approached cautiously over the course of the next year. “Here’s some good news, but don’t get too carried away” seems to be the message to British consumers.
Should you need to discuss your mortgage and the implications of this development, you know where to find us.
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