Interest rates have fallen to a more than 18-month low following the Bank of England’s Monetary Policy Committee (MPC) earlier today, with the base rate dropping from 4.75 per cent to 4.5 per cent.
The central bank has kept the base rate high in recent years as part of its efforts to bring down inflation, but what does this development mean for your savings, mortgages and pensions?
What is the base rate?
Set by the Bank of England, the base rate is the interest rate that is applied to other banks, building societies and lenders, and essentially determines the cost of borrowing money in the UK.
The base rate is often raised to rein in the consumer price index (CPI) rate, which reached a height of 11.1 per cent in October 2021, as it influences how much people are spending.
While inflation remains higher than the Bank’s desired target of two per cent, analysts are predicting multiple interest rate reductions from the financial institution in 2025.
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How will the base rate impact your pensions, savings and mortgage?
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What does the base rate cut mean for your pensions?
While today’s decision from Bank policymakers will likely be welcomed by many, analysts are sounding the alarm over the likely impact on those preparing a retirement savings plan.
Lily Megson, the policy director at My Pension Expert, explained: “For many Britons, a lower cost of borrowing is positive, but the flip side is that lower interest rates will mean challenges for savers, especially those nearing retirement.
“Indeed, we should expect many retirement planners to now question whether their strategy and financial products still serve their interests. However, without reliable support, these questions can be hard for people to answer.
“That’s where the government must step in and do much, much more. We’ve heard plenty of rhetoric about pension reforms designed to both boost the economy and provide better outcomes for savers. But now is the time for decisive action – the Government has to turn promises into policy.
Britons have seen the base rate change multiple times in recent years
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What does the base rate cut mean for your savings?
Savers have been one of the few groups to directly benefit from the central bank’s rate hikes, as these increases have been passed onto the account holders at high street banks and building societies.
With this latest development, analysts are warning customers to expect competitive savings deals from being withdrawn from the market with some banks offering rates of up to eight per cent.
Albert Codorniu, the head of Savings at Revolut, said: “I wouldn’t be surprised if we saw those who stayed silent and refused to pass on savings to customers now start to slash their rates.
“It’s a familiar pattern: customers foot the bill when rates rise, but get little in return when they fall. Savers should still be rewarded with growth on the money they work hard to put aside.”
What does the base rate cut mean for your debt?
Consumer analysts are urging those who have been saddled with interest-hiked debt repayments to “shop around”, including Compare the Market’s money expert Charlie Evans.
“Today’s cut is a step in the right direction for more competitive deals to enter the market, which is good news for anybody looking to consolidate debt or borrow. Shopping around online and taking advantage of price comparison websites is a great way to find the right deal for your needs,” he said.
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Mortgage costs are likely to comet down thousands of Britons due to the base rate decision
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What does the base rate cut mean for your mortgage?
Mortgage holders and prospective homebuyers are likely to be the biggest winners from today’s base rate reduction, according to Simon Gerrard, the managing director at Martyn Gerrard Estate Agents.
Gerrard said: “The market has been eagerly anticipating this cut to the base rate, and with inflation back under control, I think there is optimism that we could see the Bank of England continue to lower rates, which will lead to cheaper mortgages and boost the housing market.
“That said, any savings from the base rate being cut is likely to be offset by the ill-advised decision to end Stamp Duty relief in April, which will make all home purchases more expensive, especially for first-time buyers.
“It’s a highly positive sign for the market to see base rates coming down, though many mortgage lenders may have already anticipated this cut and adjusted their rates accordingly. “
