Why did Bank of England cut interest rates and what does it mean for your mortgage and Trump effect?

The Bank of England has cut interest rates for the second time in four months, after inflation fell back to normal levels earlier this year.

Rates had been at 5% after policymakers previously cut them over the summer – on Thursday they came down again.

The Bank of England’s Monetary Policy Committee (MPC) reduced the base interest rate to 4.75%, a quarter-point cut.

The Bank of England has cut interest rates for the second time in four months, after inflation fell back to normal levels earlier this year. | PA / Canva

It is the second time interest rates have come down this year, following a period of higher borrowing costs amid skyrocketing inflation in 2022 and 2023.

Eight of the Bank’s Monetary Policy Committee members voted in favour of cutting the base rate, versus one who preferred to keep it unchanged.

What does this mean for mortgages?

Hikes in recent years have left mortgage rates much higher than was normal for most of the last decade.

But the latest cut is unlikely to push mortgage rates down immediately because it was “almost fully priced in” by providers, according to Laith Khalaf, an analyst at investment firm AJ Bell.

Greig Brown, Mortgages Operations Director at Aberdeen Considine | David Johnstone Photography

In fact, the impact of past interest rate hikes is still leading to higher borrowing costs for existing mortgage holders.

Around 800,000 fixed-rate mortgages with an interest rate of 3% or below are expected to be refinanced per year, on average, until the end of 2027.

But variable mortgages “should fall back” as a result of the cut, Mr Khalaf added.

Greig Brown, mortgage director at Aberdein Considine, advised that buyers (and those looking to remortgage) should act early to secure the best rate.

Brown added: “All things considered, this is positive news for existing and prospective homeowners. The outlook for the next 12 months is still optimistic, albeit slightly tempered by the recent Budget, and expectation is that rates will continue to reduce, slowly, over the next six to 12 months.

“One key point to finish with though, is that it is unlikely to be a smooth road. We will see fluctuations and rates may rise as well as fall over the coming months. So for those who already hold a mortgage, the advice would be to act early, speak to a mortgage broker or your lender 6 months before your current mortgage deal expires.”

What about inflation?

The main inflation figure, which covers the whole economy, fell to 1.7% in September, below the Bank’s 2% target, which prompted the rate cut.

But inflation is expected to rise again towards the end of this year, as energy costs go up over the winter.

Inflation is also expected to stay higher for longer than previously forecast following spending and tax rises announced in Labour’s autumn Budget, the Bank said.

Will rates continue to fall now?

The MPC, which makes rate decisions, is due to meet once more this year, and most experts think they will not cut rates.

Mr Bailey reiterated his call for rates to fall “gradually”, saying the Bank should not cut “too quickly or by too much”.

Sarah Coles of investing platform Hargreaves Lansdown said: “The Bank of England has delivered one more cut for the road before it’s widely expected to shut up shop for a while and wait for the dust to settle.”

She pointed to more borrowing in the Budget, a rise in the minimum wage and an increase to employer National Insurance contributions as the reasons, which were all cited in the Bank’s latest report as potentially pushing inflation up.

The timing of possible gifts and the passing of assets should be given careful consideration following Rachel Reeves’ Autumn Budget (Picture: Jordan Pettitt/PA Wire)

What about the Government?

Rachel Reeves said the interest rate cut would be “welcome news” for millions of families but that households are still facing a challenge after Liz Truss’ mini-budget.

“Today’s interest rate cut will be welcome news for millions of families, but I am under no illusion about the scale of the challenge facing households after the previous Government’s mini-budget,” the Chancellor said.

“This Government’s first Budget has set out how we are taking the long-term decisions to fix the foundations to deliver change by investing in the NHS and rebuilding Britain while ensuring working people don’t face higher taxes in their payslips.”

Does this mean the economy is doing well?

Mortgage rates are still high, but a cut to the base rate is good news for the housing market. It also indicates that the Bank thinks inflation is under control.

That is a small positive for consumers, as it means prices on everyday shopping items are rising slower than before.

The Bank’s latest economic report also indicated that economic growth will be stronger than previous estimates next year, partly because of the extra spending and borrowing laid out in the Budget.

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Mr Bailey said falling inflation “not only continues but actually has been faster than we expected, and that’s good and encouraging.”

What about the Trump effect?

Donald Trump’s victory in the US election this week brings with it the threat of trade tariffs, a key policy he has touted.

Many experts think Mr Trump’s policies could ultimately contribute to rising inflation in the UK.

Mr Bailey said he would “work very closely” with the US administration but refused to speculate over potential Trump policies.

He said: “Let’s wait and see where things get to. I’m not going to prejudge what might happen, what might not happen, where policy goes.”

Mr Bailey added: “I do think we have to watch very carefully the fragmentation of the world economy. I will say that.”