Mortgages, savings, loans and economic outlook - what first interest rate cut in 4 years means for you

The Bank of England’s decision to cut interest rates for the first time in more than four years will bring a huge collective sigh of relief to hard-pressed borrowers and businesses.

The central bank trimmed the official base rate from its 16-year high of 5.25 per cent to 5 per cent, following a split vote which saw some members of the nine-strong monetary policy committee (MPC) prefer to keep the level unchanged. Governor Andrew Bailey, who voted for a cut, said “inflationary pressures have eased enough that we’ve been able to cut interest rates today”.

The move marks a turning point for the Bank of England, which has not implemented a rate cut since the onset of the pandemic towards the start of 2020. In typically cautious fashion, Bailey signalled that the bank was going to be careful not to cut rates too quickly in the months ahead. Inflationary concerns remain, particularly around the service sector.

Most cash savers will continue to enjoy real returns on their savings, comfortable beating the current rate of inflation.

Nonetheless, this initial rate cut - potentially triggering another one by the end of the year - will be welcome news to businesses and mortgage holders, even if the main benefits at first will be psychological rather than monetary. As Suren Thiru, economics director at accounting body ICAEW points out: “While this rate cut marks a notable shift in direction, the financial reality facing households and firms won’t materially change, as this is just one step back from the previous period of 14 rate hikes.”

Mortgages:

The rate cut provides a crucial signal to first-time buyers and those looking to move that now is the time to buy and sell and should stimulate a housing market that has been struggling for some time.

First-time buyers and those about to re-mortgage are likely to benefit from lower rates and more attractive packages in the coming days and weeks, while the 1.2 million people on tracker and standard variable rate mortgages should see the benefits very quickly. Meanwhile, landlords with mortgages on rental properties will benefit from reduced payments, potentially easing the pressure on their tenants and making renting more affordable.

The August interest rate cut is likely to be followed up by one more in the coming months and could help stimulate a housing market that has been struggling for some time.

The Mortgage Stop said the cut marks a “significant turning point for many households”, pointing out that for those borrowing £200,000 over 30 years, it could mean a saving of up to £360 a year.

Savings:

Savings rates on the likes of cash ISAs and bonds have been coming off the boil for some time now on the expectation that interest rates would come down as inflation cools.

These rates are now likely to fall further meaning savers should act sooner rather than later to lock in cash for fixed periods of time such as one or two years. The highest easy access rate in the market and highest one-year fixed bond still pay in excess of 5 per cent. Rates above that level - beating inflation more than two-fold - may disappear by the end of the year, with easy access rates likely to come under the most pressure, according to savings experts. Banks have also been slow to pass on the benefits of higher interest rates to savers, a point highlighted by the Financial Conduct Authority (FCA) last year. Savers might be a little disappointed at the bank rate cut and may need to shop around even more now, or make the switch to one of the online challenger banks offering better rates. However, most cash savers will continue to enjoy real returns on their savings, comfortable beating the current rate of inflation of 2 per cent.

Other debt:

Those with fixed-APR loans on the likes of cars and household goods will not be affected by a lower base rate, their monthly payments remaining the same, while credit card holders may find it takes some time for the benefits of lower interest rates to filter through.

Economic outlook:

Four members of the MPC, including the Bank of England’s chief economist Huw Pill, voted to hold interest rates at 5.25 per cent, rather than cutting them now. Those policymakers felt they needed to wait for “stronger evidence” that the risks of underlying inflation pressures were not going to worsen. These pressures include services inflation, stronger-than-expected economic growth and elevated wage rises.

The central bank expects the UK economy to grow by 1.25 per cent this year, higher than its previous outlook of a 0.5 per cent rise. It kept its outlook the same for economic growth in 2025 which it expects to ease to 1 per cent.

Business leaders said many smaller firms would welcome the breathing space, with the rate cut potentially leading to an increase in investment as borrowing costs cool.

David Bharier, head of research at the British Chambers of Commerce, said: “This cut became inevitable as inflation has settled at around 2 per cent over recent months. Our economic forecast expected this cut, as well as a further reduction by December, bringing the interest rate to 4.75 per cent by the end of the year.

“A cautious and well-communicated approach from the Bank of England will support business confidence, which has been steadily increasing in recent months. As the Chancellor begins to prepare her autumn Budget, we want to work in partnership with government to unlock the investment needed to boost economic growth.”

Anna Leach, chief economist of the Institute of Directors, added: “We’re not expecting much more by way of rate cuts this year. With wage growth and services inflation still high, and headline inflation expected to rise in the coming months, monetary policy is set to stay restrictive for a good while yet.”