The Bank of England has announced a reduction in its base rate, bringing it down from 5% to 4.75%. This base rate is an essential figure that dictates the interest rate at which the central bank lends money to commercial banks and lenders. As a result, changes to the base rate have a direct influence on various financial products, particularly mortgage and savings rates. When the base rate decreases, it often leads to a reduction in the cost of borrowing, which can have a significant impact on those with variable-rate loans or mortgages.
This reduction marks the second time in 2024 that the Bank has cut the base rate. In August, it fell from 5.25% to 5%, and now the Bank has taken another step in lowering the rate. The decision has sparked widespread attention and concern, particularly for borrowers, as the lowering of the base rate could signal relief for many households struggling with higher mortgage repayments due to previous rate hikes.
One of the main reasons behind this move is the ongoing effort to bring inflation down closer to the Bank’s 2% target. The central bank’s monetary policy committee is adjusting rates in response to the prevailing economic conditions. With inflation showing signs of easing, the Bank of England appears to be taking steps to support economic growth and ease the financial pressure faced by businesses and consumers alike.
For homeowners with variable-rate or tracker mortgages, this reduction in the base rate could lead to a decrease in monthly payments, offering them some welcome relief. However, those on fixed-rate mortgages will not see an immediate impact from this change. They will only experience the effects once their fixed-rate term comes to an end and they remortgage, potentially at a lower rate, depending on the market conditions at that time.
This change also means that savers may experience a decrease in the interest rates they earn on savings accounts, as banks adjust their rates in response to the base rate change. While this is positive news for borrowers, it does not necessarily benefit savers, as the returns on savings could become less attractive.
The Bank of England’s decision to lower the base rate highlights the continued uncertainty surrounding the economy and the balancing act the central bank faces in trying to manage inflation while supporting growth. Many will be watching closely to see if this trend continues in the coming months, particularly with further rate cuts potentially on the horizon as economic conditions evolve.
Why the base rate was cut
The Bank of England uses the base rate as a primary tool to control inflation, which is the rate at which prices increase over time. The central bank’s goal is to keep the Consumer Prices Index (CPI) measure of inflation around 2%, a target set by the Government to maintain economic stability. Inflation that is too high can erode purchasing power, while inflation that is too low may signal a weak economy.
Recent figures reveal that CPI inflation has fallen to 1.7% as of September 2024, marking its lowest level since April 2021. With inflation now below the Bank’s target, the Monetary Policy Committee (MPC) has decided to lower the base rate in a bid to stimulate further economic activity and continue progress towards the Government’s inflation goal.
The MPC voted by a majority of eight to one to reduce the base rate by 0.25 percentage points, bringing it down to 4.75%. The decision reflects the view of eight members who agreed that the reduction was warranted given the current economic conditions. One member of the MPC, however, voted to keep the rate at 5%, citing concerns about the potential risks of cutting the rate too quickly.
In its explanation for the decision, the Bank of England stated that “there had been continued progress with disinflation.” This term refers to a slowing of the rate of inflation, meaning inflation is still positive but rising at a slower pace. With inflation trending downwards, the Bank feels confident that reducing the base rate will help maintain momentum towards its target while also supporting broader economic stability.
This move is seen as an indication that the Bank is cautiously optimistic about the economy’s recovery, with further cuts potentially on the table if inflation continues to fall. As always, the impact of this decision will be closely monitored by businesses, consumers, and financial markets.
Will the base rate fall further?
The Office for Budget Responsibility (OBR) has projected that the Consumer Prices Index (CPI) rate of inflation will rise above the Government’s target next year, reaching 2.6%. This anticipated increase is largely attributed to measures announced in the recent Autumn Budget, including a boost in Government spending and a rise in National Insurance contributions for employers. These changes are expected to push up prices for consumers in the near future.
However, experts have warned that these inflationary pressures, coupled with an increase in Government borrowing outlined in the Budget, could slow down the pace of any future base rate cuts. The additional spending and borrowing could delay the Bank of England’s ability to reduce interest rates as quickly as initially anticipated.
Paul Dales, Chief UK Economist at research firm Capital Economics, has revised his outlook, stating: “We no longer think rates will be cut quicker in the second half of 2025. We now expect rates to fall only as far as 3.5% in early 2026, rather than to 3%.” He noted that this adjustment was driven more by the implications of the UK Budget than by other factors, such as the US election.
Susannah Streeter, Head of Money and Markets at Hargreaves Lansdown, also weighed in, pointing out that the strengthening of the US dollar could further increase the cost of imported goods into the UK, adding to inflationary pressures. She suggested that, as a result, the Bank of England is likely to adopt a more cautious approach when it comes to reducing interest rates. “A move below 4% by the end of next year looks more unlikely, but a lot can change between now and then,” she concluded.
With these factors in play, the outlook for interest rates in the UK remains uncertain, and further developments, including the impact of global economic conditions, will play a critical role in shaping future decisions.
I have a mortgage – what does this mean for me?
We will be reaching out to all major lenders to request confirmation on any changes to tracker or fixed mortgage rates in response to the recent base rate cut. Once we have more information, we’ll update this story accordingly.
In the meantime, here are the key things mortgage borrowers need to know:
For those on a fixed-rate mortgage deal, there’s no immediate change – but it’s important to keep an eye on rates if your deal is nearing its end. Regardless of what happens with the base rate, the amount you pay won’t change during your fixed period. However, if you’re approaching the end of your deal, it’s wise to start looking at new offers now. If you don’t, you could find yourself moved onto your lender’s more expensive standard variable rate (SVR). Typically, you can lock in a new mortgage deal between three and six months before your current one ends.
If your deal is expiring soon but you don’t want to re-fix just yet, you might want to consider a tracker mortgage that doesn’t come with early repayment charges. This could give you the flexibility to move onto a fixed deal if rates drop, without any penalties. However, bear in mind that tracker rates are generally over one percentage point more expensive than the cheapest fixed-rate deals.
For those on a tracker mortgage that directly tracks the base rate, you’ll see your rate decrease. Your monthly repayment should also reduce, typically within days or weeks, depending on when your next payment is due.
If you’re on your lender’s SVR, there’s a chance your rate could come down as well. Lenders can adjust SVRs at their discretion, although these changes usually align with shifts in the base rate. However, it’s worth noting that SVRs are usually much more expensive than fixed or tracker deals. Currently, they tend to range between 7% and 8%. Given this, it’s advisable to check if you can save money by switching to a different deal – and chances are, you can.
I’m a saver – what should I do?
Since the base rate was last reduced in August, savings rates have generally fallen across the board. With today’s cut, it’s expected that they will continue to decrease, and in the coming weeks, the benchmark rate is likely to settle between 4.7% and 4.9%.
So, how can you make the most of your savings? As Martin Lewis, the founder of MoneySavingExpert.com, advised in his latest weekly email, the first step is to check your interest rate. Millions of people are still on poor rates and could easily move their money to an account that offers a higher return. If you’re on a fixed-rate deal, make sure to diarise and act before your fixed term ends.
At the very least, you should be getting the best standard easy-access rate. At present, two of the top easy-access cash ISAs offer better rates than the best regular savings accounts, making them a good choice for anyone who hasn’t yet used up this year’s £20,000 ISA allowance.
Both Trading 212 and Moneybox offer rates of 5.17% and allow you to transfer any funds from previous years’ cash ISAs. It’s important to note that the savings protection provided by Trading 212 comes through Barclays, NatWest, or JPMorgan. For further information, check out our Cash ISAs guide.
If you’ve already used your ISA allowance and have more to save, the top rate for a regular easy-access savings account is currently 5%, offered by Chip. However, there’s a limit of three withdrawals per year.
For those who have money to lock away, fixed-rate savings accounts offer the advantage of certainty. In exchange, your money will be locked in, and you won’t have access to it. Currently, one-year fixed deals tend to offer better rates than longer-term ones. App-based Atom Bank is offering 4.8% on a minimum deposit of £50.
As rates continue to fall, it’s important to regularly monitor your savings and compare the interest you’re getting with the best available rates. Switching easy-access accounts is simple, so keep an eye on our Best Savings Rates guide for the latest offers.
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