The Bank of England cut interest rates today for the first time in more than four years bringing relief to millions of home owners and businesses.
The Bank’s Monetary Policy Committee (MPC) voted by 5 to 4 to cut its benchmark rate by 0.25% from 5.25% to 5%. That compares with a 7-2 vote to hold rates last time.
It will mean a monthly saving of around £42 on a typical London tracker mortgage of £300,000 with bills falling from £1,667 to £1,625. The majority of borrowers on fixed rate mortgages will see no immediate change in their repayments but the move is expected to encourage all high street lenders to start reducing the cost of their deals.
The MPC said: ”It is now appropriate to reduce slightly the degree of policy restrictiveness. The impact from past external shocks has abated and there has been some progress in moderating risks of persistence in inflation.”
he news immediately boosted the FTSE-100 index of leading company shares and knocked nearly three quarters of a cent off the value of the pound against the dollar.
Professor Joe Nellis, economic adviser to accountants MHA, said: “Not only will this news be welcomed by mortgage borrowers but will be warmly greeted by the new UK government as they embark on their pursuit of growth and the revitalisation of the economy, particularly in light of the recent IMF warning that the UK economy will need to grow at three times the current rate to ensure that Labour can fulfil both its spending commitments and its promise to not raise taxes.
The Bank’s move comes on the eve of the first anniversary of the cost of borrowing being raised to a 16 year high 5.25% on 2 August 2023.
That marked the end of a run of 14 rate rises on trot from December 2021 in a bid to keep inflation under control.
However, inflation was stoked by Russia’s full scale of invasion of Ukraine in February 2022, which sent energy and food prices soaring. The headline measure of inflation, the Consumer Price Index (CPI) soared to a 41 year high of 11.1% in October 2022 but is now back at its target rate of 2%.
It is only the second time the cost of borrowing has been cut since the end of the financial crisis. It came down from 0.5% to 0.25% in the wake of the Brexit referendum, and from 0.25% to an all time low of 0.1% at the start of the pandemic in March 2020.
The cut is expected to give a big psychological boost to the property market. Coventry Building Society said it would cut all its variable mortgage rates from 1 September.Matt Thompson, head of sales at agents Chestertons, said: “Some buyers eagerly anticipated a cut of interest rates in order to pursue their property search. Last month, we witnessed the return of some buyer confidence as lenders introduced slightly more attractive mortgage products and the Bank of England’s decision to also cut rates will fuel buyer activity further over the coming months.”
Simon Gammon, Managing Partner, Knight Frank Finance, said: "Today's decision will have a limited impact on mortgage rates but it will be transformative for sentiment. There is a meaningful group of buyers that put off moving home in the wake of the mini-budget that can now push on with confidence. The Bank of England has been particularly cautious, so by opting to cut the base rate it has sent a real statement that inflation is largely beaten.
"The lenders have already cut margins to the bone, so this cut was pretty much priced into fixed rates. That said, we've seen that the larger lenders are happy to take a hit to profits to gain market share, so we may well see another round of marginal cuts in the days ahead."
