Interest rates UK: How the freeze impacts borrowers and savers and when rates will fall next

Borrowers and businesses will have to wait until November at the earliest for any further reduction in interest rates after the Bank of England decided to sit on its hands, despite concerns over the strength of the UK economy.

As was widely expected, Britain’s central bank opted to leave the base rate unchanged at 5 per cent, but said it could reduce borrowing costs “gradually over time” if inflation stays low. Its decision came less than 24 hours after the US Federal Reserve opted to cut US interest rates for the first time in more than four years.

In the UK, eight of the nine members on the Bank of England’s monetary policy committee (MPC) voted to keep the base rate unchanged. The decision to pause comes just weeks after the central bank trimmed rates by a quarter point from 5.25 per cent, instigating the first reduction since 2020 and delivering good news to borrowers and mortgage holders.

These have been a stormy few months for rate-setters at the Bank of England, above.

Analysts said the latest 8-1 vote was a surprise but showed that the bank needed to see further evidence that inflation was holding steady before interest rates can drop further. The MPC, which uses rates as a tool to control inflation, said it wanted to make sure that persistent inflationary pressures were squeezed out so that price rises remain at the bank’s 2 per cent target level. On Wednesday, it emerged that the annual rate of consumer price inflation was unchanged last month at 2.2 per cent.

Susannah Streeter, head of money and markets at investment platform Hargreaves Lansdown, said the note of caution from policymakers had caused “concern to creep in about the pace of rate cuts ahead”. Financial markets had been pricing in the possibility of two more quarter-point cuts before the end of the year, which would take the UK base rate down to 4.5 per cent. The next MPC meetings are due to take place on November 7 and December 19.

Mark Hicks, head of active savings at Hargreaves Lansdown, said the decision to hold interest rates was “good news” for savers.

“Banks and building societies had started to price in the possibility of a cut over the past few days, and if this had materialised, we would have seen others swiftly follow suit,” he noted. “However, this good news is unlikely to last. Further cuts later this year are likely to hit the easy access market the most, because those rates remain the most sensitive to the base rate. Fixed rates are still the best option for anyone who doesn’t need the money close at hand.”

Falling mortgage rates bode well for home buyers and the property market in general.

Kevin Brown, a savings specialist at Scottish Friendly, added: “Although rates have been held, the cash savings market is steadily deteriorating. This means for long-term savings people may want to consider looking beyond cash for their long-term growth prospects.”

Mortgage experts said that while borrowers may have been hoping for better news, there had been a gradual downward trend in mortgage rates in recent months and that pattern was likely to continue.

Peter Stimson, head of product at Mpowered Mortgages, said: “Fierce competition among lenders is also a major contributing factor, as providers are continually repricing deals to keep up with their rivals. A return to the days of ultra-low mortgages may be behind us, but the good news for homeowners is that we have passed the peak and deals should continue to get cheaper.”

The average two-year fixed rate mortgage is currently 5.37 per cent, whereas three months ago it was close to 6 per cent. Experts said that with competition hotting up, and amid expectations of further interest rate cuts in the coming months, some new deals were launching at less than 4 per cent, which bodes well for home buyers and the property market in general.

James Sproule, UK chief economist at Handelsbanken, said that despite the clear-cut MPC vote and concerns over service sector inflation, he anticipated a quarter-point cut in rate in November.

“We maintain our forecast of a reduction in November and again in February 2025,” he added. “There was not an MPC inflation report issued with this rate decision, the next MPC report will accompany the November 7 meeting.”

For the eight members who voted to keep rates the same, a slowdown of price and wage rises, and the UK economy growing in line with forecasts, was evidence that a gradual approach to easing rates was necessary. They also noted some uncertainty in the global outlook, such as weaker demand for oil leading prices to fall, which warranted the need for caution.

One member, Swati Dhingra , voted to reduce rates to 4.75 per cent because she felt that inflation had been on a downward path for some time, and that it would take time for lower rates to filter through to the economy.

Hal Cook, senior investment analyst at Hargreaves Lansdown, said: “There remains an expectation that there will be at least one further cut in the UK before the end of 2024. In terms of the size of further cuts this year, they’re likely to be either 0.25 or 0.5 per cent.

“All eyes are on the next meeting in November. Looking further out, it’s less clear what might happen to UK rates. But it seems more likely that we’ll see further cuts as opposed to rate rises given the general economic picture of lower inflation and limited growth.”