The Bank of England has cut interest rates to 4.75%, which was expected by the markets. This is only the second rate cut of the year, despite earlier predictions of more cuts. Chancellor Rachel Reeves recently announced significant fiscal loosening through high levels of borrowing, which could lead to further inflation in the short term. This may result in a slower easing cycle for the UK compared to the US and EU. The Office for Budget Responsibility (OBR) predicts that the higher public spending will lead to slightly fewer interest rate reductions.
On the positive side, services inflation has decreased from 5.6% to 4.9%, which should give the Bank of England more confidence in cutting rates further. However, evidence of continued economic deceleration will likely be necessary before more rate cuts are made. Governor Andrew Bailey has indicated that the Bank of England will not rush to reduce rates further.
For mortgage holders with tracker and standard variable rates, the rate cut means a reduction in monthly payments. However, those renewing soon may find the interest rate environment challenging, as the easing cycle has not accelerated as quickly as hoped. Mortgage rates remain relatively high compared to the past decade, despite some deals as low as 4%. It is recommended for mortgage holders to consider fixing their rates for a longer term to protect against future market fluctuations.
On the other hand, savers have not experienced as quick or severe cuts to their interest rates. With the inflation rate below 2%, there are still opportunities to grow savings that outpace inflation. Fixed-rate savings accounts and Cash ISAs are good options for maximizing tax-free savings. Plum is currently offering a competitive AER of 4.92% on Cash ISAs, which is one of the best rates available.
Overall, the economic outlook in the UK remains uncertain, with the Bank of England taking measured steps to support growth while managing inflation. Consumers are advised to carefully consider their mortgage and savings options in light of the changing interest rate environment.
