Bank of England Cuts Interest Rates to 4.75%

The Bank of England has announced that it will cut the base rate by 0.25 percentage points from 5% to 4.75%.

This is the second base rate cut this year, following the Bank’s decision to cut rates from 5.25% to 5% in August. It was the first reduction since interest rates started to rise following the end of the pandemic.

This follows the Bank’s last meeting in September, where they agreed to keep interest rates at 5%.

Andrew Bailey, the Governor of the Bank, stated it was “likely that interest rates will continue to fall gradually from here”. He also added he was cautious about cutting rates too quickly, “We need to make sure inflation stays close to target, so we can’t cut interest rates too quickly or by too much.”

The Monetary Policy Committee voted 8 to 1 to reduce the base rate to 4.75%. One member voted to retain interest rates at 5%.

The decision follows the confirmation of Donald Trump’s election as US President and before a likely 0.25% cut in interest rates by the Federal Reserve.

Households around the country will welcome the news, but there will be apprehension given President-Elect Trump’s repeated commitments to impose tariffs on goods imported into America. A decision which, if taken, could lead to a rise in inflation as companies pass on these costs to consumers.

The rate cut also follows the Autumn statement, which will see £40 billion worth of tax rises. Chancellor Rachel Reeves welcomed the Bank’s decision stating it’s “welcome news for millions of homeowners and businesses”.  She also added that “our public finances are now on a firm footing” and the government won’t need to “come back with another load of tax increases”.

The new shadow chancellor, Mel Stride, was also positive about the decision, stating the rate cut “will be welcomed by millions of homeowners and builds on the work the Conservatives did in office to hold inflation down”. He was less favourable about Labour’s autumn budget, stating: “However, the independent OBR and the Bank of England set out that as a result of Labour’s choices in the Budget last week, inflation will be higher. The government must not undo the hard work the last government did.”

What will the rate cut mean for homeowners?

According to the government’s English Housing Survey, around a third of households have a mortgage. The news that the base rate has been reduced will likely be welcomed by all households, whether they have a mortgage or not.

If you have a fixed-rate mortgage, you’re unlikely to be immediately affected by this decision unless your deal is ending soon. If you’re remortgaging in the next few months, now isn’t a bad time to consider taking out a new deal.

Your mortgage repayments will likely be lower than at the start of the year, if you remortgage onto a new deal. Lenders have lowered their rates as the bank has reduced rates. That said, according to Moneyfacts, the average two-year fixed rate deal is 5.42%, while a two-year deal is 5.13%.

This means, regardless of the Bank’s decision, you’ll still be paying more than you would have been a few years ago if you borrowed the same amount.

If you’re on a tracker mortgage that ‘tracks the base rate, your monthly repayments will be lower. This is because the interest rates follow the base rate, so a reduction in the rate will lead to a reduction in your repayments.

What will the rate cut mean for prospective buyers?

This is good news for prospective buyers, especially if you’re a first-time buyer, as mortgage rates are likely to decrease following the Bank’s announcement.

While mortgage rates are still high for the past decade, the two cuts in the base rate since August signal a slow return to lower interest rates.

Of course, this depends on other factors, such as the global economy, Donald Trump’s return to the White House, and how the markets react to the budget.

However, if inflation remains below the Bank’s target of 2%, it’s likely further cuts to the base rate will be made. This is unlikely to happen at the next committee meeting in December, but should current economic trends continue, a further reduction of the base rate in the new year is likely.

This will make homeownership more appealing to many and clarify the importance of having a decent deposit on hand to take advantage of more favourable rates if you’re looking to get on the property ladder.