Interest rate cut: The impact on your mortgage and savings and when will the next cut happen?

Further interest rate cuts are on the cards with the next one possible this spring after the Bank of England opted to trim borrowing costs to their lowest level in more than 18 months.

The central bank’s monetary policy committee (MPC) voted for a quarter-point reduction to take the base rate to 4.5 per cent after similar cuts in August and November last year. It takes interest rates to their lowest point since June 2023.

Most market traders expect that there will be two further rate cuts this year, though the likes of Goldman Sachs and Morgan Stanley believe there could be deeper cuts, with the former suggesting a UK base rate of 3.25 per cent by mid-2026. This seems especially likely if the UK economy falters in the coming months, though inflationary worries remain, particularly any negative impact from changes announced in the autumn Budget that are due to kick in from April, and any fallout from the introduction of trade tariffs.

The latest move on interest rates will have a direct impact on millions of mortgage holders and those looking to get on the property ladder or take out a new loan.

Alongside the cut in borrowing costs, the Bank of England slashed its short-term growth forecasts for Britain’s economy. Governor Andrew Bailey said the rate cut would be “welcome news to many” but added that the bank was “monitoring the UK economy and global developments very closely, and taking a gradual and careful approach to reducing rates further”.

The bank halved its growth forecast for the UK economy to just 0.75 per cent for this year, down from previous estimates of 1.5 per cent, before accelerating again in 2026 and 2027. On the inflation front, forecasts now point to a higher-than-expected peak of 3.7 per cent later in the summer. It presents a tricky balancing act for bank policymakers amid concerns the UK could enter a period of stagflation - where there is sticky inflation and muted economic growth.

Thomas Pugh, economist at audit, tax and consulting firm RSM UK, said: “It’s no surprise that the MPC chose to cut interest rates. The collapse in growth at the end of last year and apparent sharp slowdown in the labour market made that the obvious choice today. However, the path forward will be much more difficult for the MPC to navigate. Both the hike in employment costs imposed by the Budget and the looming threat of either direct tariffs on the UK or a global trade war, or both, are stagflationary.”

Two members of the nine-strong MPC voted to deliver a higher half-point cut in rates at the latest meeting, which provides a sense of how concerned some policymakers are about the clouds gathering over the economy.

The Bank of England in the City of London is responsible for setting the bank base rate.

Luke Bartholomew, deputy chief economist at Scottish fund management heavyweight Abrdn, noted: “It is hard to see the Bank of England materially stepping up its pace of easing until it sees how the increase in national insurance is digested by the economy in the spring. However, the bank’s signals today suggest there is scope for several more rate cuts this year, given the weak growth outlook, and we continue to see rates below 3 per cent over the next two years.”

The next rate-setting meeting is scheduled for March 20 though it seems more likely a further rate cut would be announced at a subsequent gathering on May 8 or June 19 after the release of fresh economic data.

The base rate helps dictate how expensive it is to take out a mortgage or a loan, while it also influences the interest rates offered by banks on savings accounts. The latest rate cut means the average mortgage holder on a tracker deal will see their monthly payments fall by £28.98, according to figures from industry body UK Finance.

The average borrower on a standard variable rate (SVR) will see monthly payments drop by £17.17, assuming the base rate reduction is passed onto them in full. The rate on SVR mortgages is set by individual lenders.

Greig Brown, mortgage director at Scottish legal firm Aberdein Considine, said: “This news will be welcomed by mortgage holders, with the 629,000 people in the UK currently on a ‘tracker’ mortgage set to benefit from reduced payments.

“Those on variable rates will need to wait and see how their lender reacts to this news, with some lenders already pricing this in, it could see little movement but this will be lender dependent.

“For those on fixed rates, their payments will remain ‘fixed’ and unchanged until their fixed rate ends. However, today’s announcement will raise optimism that mortgage rates will be more favourable when current fixed deals come to an end.”

Sarah Coles, head of personal finance at investment platform Hargreaves Lansdown, described it as a “rare good day” for anyone on a tracker mortgage, who will see their monthly bills drop.

“If they opted for a tracker 18 months ago in the hope that rates were on their way down, the three quarter-point cuts we’ve had in that time won’t feel anything like rewarding enough. However, by this stage they’ll be prepared to take whatever they can get.

“For those looking for a new fixed rate, it’s not going to move the dial significantly overnight, because the market had already largely priced this in. Right now, Moneyfacts data shows the average two-year fixed rate mortgage has inched up from 5.48 per cent at the start of the year to 5.52 per cent. It may inch down again in the coming days, but it’s not going to bring a wave of relief for anyone set to remortgage in the coming weeks and months.”

On savings, she added: “This rate cut was all-but nailed on. The savings market hadn’t just counted its chickens, it had roasted and sold them - pricing the rate cut firmly into fixed rate deals. It means the fixed term market is unlikely to move far for now.

“Meanwhile, for those banks that gamely held onto easy access rates well above 4.5 per cent, this could be the catalyst for some cuts.”

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