Analysts are betting on interest rates in the UK being cut today as the Bank of England is expected to slash the cost of borrowing to their lowest level in 18 months later today.
Economists widely predict the base rate will be reduced from 4.75 per cent to 4.5 per cent when the announcement is made at midday, which will have consequences for the savings and mortgage markets.
The anticipated cut would continue a series of reductions that began last summer, which have been put on pause in recent months, marking a significant shift in the UK’s monetary policy.
This move would represent the first time rates have reached 4.5 per cent since May 2023 and will directly influence how expensive mortgages and loans become for consumers.
Furthermore, the rate also impacts the interest returns that high street banks and building societies offer on savings accounts with some financial institutions offering deals of up to eight per cent.
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The Bank of England is expected to cut interest rates later today
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Recent years have seen mortgage rates climb significantly higher than what was typical over the past decade as a consequence of the central bank’s Monetary Policy Committee’s (MPC) decision-making.
These increases were implemented as part of the Bank’s strategy to combat rising consumer price index (CPI) inflation rate, making borrowing more expensive to discourage spending.
Interest rates reached their peak of 5.25 per cent in late 2023, before the Bank’s policymakers began implementing cuts, with the rate being brought down to its current level of 4.75 per cent.
The Bank typically increases rates when inflation is high, using it as a tool to discourage consumer spending, with the strategy aiming to slow down the rate at which prices rise across the economy.
The Bank of England’s MPC will meet today to discuss interest rates
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This approach has proven to be successful success, with the country’s CPI rate now significantly lower than the peaks of 11.1 per cent seen in October 2022.
Current inflation stands at 2.5 per cent, marking a substantial decline from previous highs. This lower inflation rate, combined with stagnating economic growth across the UK, has led economists to predict another rate cut.
A reduction in interest rates would encourage more consumer spending, helping to stimulate the economy. However, recent indicators have suggested inflation could be rising again, albeit at a more gradual pace.
Earlier this week, a survey of the service sector revealed that cost inflation increased slightly in January. This development poses a potential challenge for the Bank’s decision-making process.
The rise in cost inflation has been partly attributed to policies announced in the October Budget. Chancellor Rachel Reeves’ decision to raise National Insurance contributions for companies was designed to increase Government spending on public services like the NHS.
However, some businesses have reported that this policy is driving up their costs and contributing to inflationary pressures. Most economists believe these signs of rising inflation are unlikely to prevent a rate cut today.
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Interest rates have skyrocketed in recent years due to the Bank of England’s decison-making
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They suggest it could, however, lead to more cautious decision-making at future meetings in March and May. Chris Arcari, an analyst at finance firm Hymans Robertson, warns that the Bank will need to “walk a tightrope” regarding future rate cuts this year.
While he acknowledges the economy currently allows for a “modest reduction,” Arcari expects the Bank to “adopt cautious messaging” about future decisions.
Matthew Ryan, a chartered financial accountant for Ebury, notes that with economic growth stagnating but inflation showing signs of rising, the Bank “will have to make a judgment call about which risk is likely to dominate over the course of the year.”
Recent cost increases in the service sector and the impact of October’s Budget changes add complexity to this balance, analysts have warned.
