The Bank of England (BOE) has announced a reduction in interest rates from 5% to 4.75%, marking a significant move aimed at managing inflation and stimulating economic growth. However, the BOE also issued warnings that further rate cuts in the near future are unlikely. As inflation is expected to rise again in the coming months, the Bank cautioned that while the October budget could help boost economic growth, some measures could lead to faster price increases.
Bank of England's Outlook on Inflation and Economic Growth
Despite the recent interest rate cut, Governor Andrew Bailey emphasized that any future cuts would be gradual, citing both domestic and international risks. While the BOE aims for lower rates in the long term, Bailey stated that the current global and economic conditions require caution in making swift decisions.
Recent months have shown signs of stabilization in the UK's inflation rate, with September's inflation rate dipping below the Bank of England's 2% target for the first time in years. Although inflation is expected to rise again in October, due to increased fuel prices, the BOE originally forecasted a return to 2% by 2026. However, that forecast has now been revised to 2027.
The Bank has adjusted its inflation forecast due to several factors, including the VAT increase on private school fees and the raised cap on bus fares. The most significant factor, however, is the National Insurance increase for employers, which is expected to drive up prices as businesses pass on the additional costs to consumers.
Interest Rates and Economic Predictions: Impact on Savers and Borrowers
As for interest rates, market expectations suggest that the Bank of England will hold the current rate in December and possibly January. Paul Dales, an economist at Capital Economics, has predicted a more gradual decline in rates, with the expectation that the rate will reach 3.5% by 2026, up from the earlier forecast of 3%.
Meanwhile, the Bank of England has also revised its unemployment projections, now expecting a more significant drop in unemployment in 2025, with the unemployment rate revised downward from 4.7% to 4.1%.
For savers, the slower pace of interest rate cuts could be a silver lining. Interest rates on savings accounts have been falling, with easy access savings accounts currently offering an average interest rate of around 3%. Additionally, an estimated one million households with tracker or variable rate mortgages could benefit from a reduction in their monthly mortgage payments as interest rates continue to decline. However, mortgage rates remain relatively high, with the average rate for two-year fixed-rate mortgages at 5.4% and five-year fixed-rate mortgages at 5.11%.
Political Reactions to the Bank of England’s Decision
The interest rate cut was welcomed by both the UK Government and the Conservative Party. Chancellor Rachel Reeves praised the BOE's decision, acknowledging that while the reduction is a positive step, the government remains focused on tackling the long-term financial challenges facing households and strengthening the country’s financial foundation.
On the other hand, Shadow Chancellor Mel Stride attributed the rate cut to the work of the previous Conservative government in keeping inflation under control. He also claimed that Labour’s first budget would likely result in rising inflation.
Conclusion: What Does This Mean for UK Households?
While the Bank of England's interest rate cut to 4.75% offers some immediate relief to mortgage holders and savers, the BOE’s cautious stance on future rate cuts reflects ongoing concerns about inflation and economic uncertainty. Households can expect a gradual reduction in rates, but inflationary pressures and other economic factors may delay the full recovery in living costs.
Source: bbc.co.uk
