The MPC voted 8 to 1 in favour of cutting the rate to 4.75%, while one member voted for another month of the base rate staying at 5%.
It marks the second reduction in the space of a year, after months of the rate holding at 5.25% before its first reduction to 5% in September. The decision marks the first time in 18 months the rate has been below 5%.
The Bank of England noted that the decision was made due to “continued progress in disinflation, particularly as previous external shocks have abated, although remaining domestic inflationary pressures are resolving more slowly.”
It follows the Consumer Prices measure of inflation dropping to 1.7% in September, and the meeting’s minutes said the decision was influenced “by the need to squeeze remaining inflationary pressures out of the economy”.
This is in order to achieve the Bank of England’s 2% inflation target on “a timely and lasting basis”.
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While the inflation figure is well below the 2% target, there is an expectation this will rise to around 2.5% by the end of 2024 as “weakness in energy prices falls out of the annual comparison”.
The MPC said the decisions announced in Chancellor Rachel Reeves’ Autumn Budget are expected to boost GDP by 0.75% at the peak next year.
GDP forecast to slow
The forecasts from the Office for National Statistics (ONS) and the Bank of England project GDP growth to slow to 0.3% in the second half of the year.
However, the MPC noted there will continue to be a cautious approach until the full effects of the Budget are felt, particularly as “domestic pressures are resolving more slowly”.
The MPC’s minutes read: “There remains significant uncertainty around the outlook for the labour market. Data are difficult to interpret and wage growth has been more elevated than usual relationships would predict.
“The impact of the Budget announcements on inflation will depend on the degree to and speed with which these higher costs pass through into prices, profit margins, wages and employment.”
The minutes added: “Based on the evolving evidence, a gradual approach to removing policy restraint remains appropriate. Monetary policy will need to continue to remain restrictive for sufficiently long until the risks to inflation returning sustainably to the 2% target in the medium term have dissipated further.”
Experts have reacted to the cut and analysed how this will hit the returns of savers and the repayments of borrowers.
‘More rate cuts will follow’
Paul Noble, CEO of Chetwood Bank (formerly Chetwood Financial), said: “This decision is significant. Today’s cut is a signal of intent and confidence from the Bank of England.
“Buoyed by positive inflation news, even a degree of market volatility after last week’s Budget and the reaction to the US election results has failed to deter the central bank from its path, suggesting more rate cuts could follow in the months ahead as it attempts to spark greater growth and investment across the UK economy.
“While the base rate remains high in comparison to the near 0% levels we had seen throughout the 2010s, it has now dropped twice in the past three months. So, as we turn a corner on that latest interest rate peak, now is an opportune moment for people to reconsider their short- and medium-term savings plans, especially as we’re seeing rates fall across instant-access and fixed term accounts.
“As ever, it is vital that consumers shop around for not just the best rates but also the best products – easy-access or fixed term – to suit their individual needs, especially at a time when the base rate is moving. Crucially, the base rate now sits comfortably above inflation, meaning there are still plenty of opportunities for savers to capitalise on opportunities to make their money work hard for them.”
In terms of mortgages, “markets will breathe a sigh of relief”, according to Paresh Raja, CEO of Market Financial Solutions.
This is likely to lead to lower rates available for borrowers remortgaging or buying for the first time.
‘Lenders able to pass lower rates for borrowers’
Raja said: “A cut always looked likely, but the turbulence of the past week – the Budget and US election – could have encouraged the Bank of England to hold. Lenders are able to pass lower rates on to borrowers, providing a much-needed boost to homebuyers and property investors alike. We anticipate that the market will gain momentum in the coming weeks as it adjusts to a more accommodating – though still challenging – monetary environment.
“The house price growth following the Bank of England’s last rate cut in August reflects this impact, and today’s cut should inspire further confidence. It’s therefore crucial that investors prepare for a likely surge in market activity and position themselves to seize any opportunities that could soon emerge.”
He added: “However, it’s important to recognise that interest and mortgage rates remain significantly higher than pre-December 2021 levels. As a result, securing suitable financing options will still be a significant challenge for some borrowers – this is where the specialist lending sector will continue to play a vital role.
“To help build momentum in the property market, lenders must now step up and focus on providing a diverse range of bespoke and flexible financial products that can meet the specific needs of brokers and their clients.”
