The Bank of England’s Monetary Policy Committee made a dramatic start to February by slashing the base rate by 0.25 percentage points to 4.5%. The cut sees the UK’s central interest rate fall to its lowest level in more than 18 months.
Of course, that sounds like good news, but there could be some challenges in its wake. At Continuum we are looking at why, and what it all means for your money.
Inflation is down
The bank started hiking the bank rate when it started to be apparent that the historically low rates necessary to get the economy moving after the Covid lockdowns had actually triggered runaway inflation.
Increasing the cost of borrowing money by increasing the bank rate puts the brakes on the economy and on inflation too.
The good news is that inflation eased to 2.5% in December, making a rate cut possible.
The bad news? High rates may have gone on for a little too long and increased the risk of the economy falling into recession. The labour budget and increased National Insurance costs had already caused business owners some sleepless nights.
As well as cutting the base rate, the Monetary Policy Committee (MPC) slashed its growth forecast for 2025 in half. We could be heading for some choppy economic waters.
However, the announcement from Threadneedle Street may have come in time. the FTSE enjoyed a record high as traders prepared for the rate cut, and anticipated further reductions during the course of 2025 – although the £ fell against the dollar.
The economy might not be fully fit, but the bank may have given it the shot in the arm it needs.
What will the cut mean for you?
Any cut will be welcome news for mortgage borrowers. Lenders can be expected to adjust their pricing in response to base rate forecasts, and borrowers with tracker mortgages will see an almost immediate cut in their monthly payments. However, many other borrowers and would-be borrowers were left disappointed after rates actually increased following the last cut in November 2024.
This saw the average rate charged for a two-year fixed deal rising from 5.39% to 5.52% between November and the start of this month. The average five-year fixed rate saw a steeper climb from 5.09% to a six-month high of 5.32% over the same period.
This was because fixed rate mortgages are based on the ‘swap rate’ market which is influenced by a wide range of factors, and which reflects the money market’s view of the future. The actual cost of borrowing can be affected by global conflicts as well as the decisions of the Bank of England.
What should you do if you are shopping around for a new mortgage, or have one of the approximately 1.8 million fixed mortgage deals set to expire in 2025? The mortgage market is volatile. Call us at Continuum for some expert help in finding the deal that’s most appropriate for you.
What about savers?
Savers have been hit by two similar base rate reductions in the latter half of 2024 and this latest cut is looks sure to lead to savings account providers easing back the returns they offer.
Some of the UK’s biggest high street banks are already less than generous, paying 1.66% on easy access accounts. Challenger banks may offer better returns, but as with mortgages, shopping around may be essential.
Are you seeking a suitable saving option with a good rate of return? Call us at Continuum for help with finding the account the offers you a suitable combination of interest rate and the access you need.
Thinking about the future
Falling interest rates can be good news or bad, depending on whether you are a borrower or a saver. But they will certainly affect long term planning as well as your short-term financial tactics. The calculations that drive your decisions about investing, your pension and providing for your family can may all need to be looked at again.
At Continuum we can help you make those calculations, and help you find the financial products to put them into practice.
Start preparing for a better financial future. Call us for the help you need at Continuum today.
Interest rates and Bank Rate | Bank of England
Pound plunges after Bank of England cuts interest rates
Why are interest rates high and how quickly might they fall? | Bank of England
Bank of England Cuts Base Rate to 4.50%
The information contained in this article is based on the opinion of Continuum and does not constitute financial advice or a recommendation to a particular product and you should seek independent financial advice before embarking on any course of action.
The Financial Conduct Authority does not regulate deposit accounts or taxation advice.
Equity investments do not afford the same capital security as deposit accounts
The value and returns of an investment are not guaranteed, investors may lose some or all of their investment. When investing Capital is at risk.
You may have to pay an early repayment charge to your existing lender if you remortgage.
Your home may be repossessed if you do not keep up repayments on your mortgage.
