Interest rate cutting has just occurred in the Bank of England for the first time in over four years with the base rate slashed from 5. 25% to 5%. Also this decision made in a tight poll among policymakers is good to some extent to give some relief to homeowners by cutting down the mortgage costs. Yet, the governor of the Bank of England warned that the cost of borrowing will not go down significantly in the near future.
Speaking on the decision to cut the rate, Governor Andrew Bailey observed that inflation pressures have eased and made the cut possible but warned other similar measures need careful implementation in order to sustain inflation rate at low levels. This infers that subsequent CBR cuts will be smaller than the previous hikes.
Analysts have however forecasted that the rates will not be touched again in September and perhaps another cut in November. The former UK Prime Minister Rishi Sunak raised his voice over the UK finances stating that recent payments for the public sector might hamper any further rate cut. Still, the above pay increases are not expected to ignite inflation by the Bank of England.
The head of the opposition, Chancellor Rachel Reeves welcomed the decrease saying that for homeowners it is a great relief but they are still paying high interest rates on their mortgages after the mini-Budget in 2022 spearheaded by Ms. Truss. On tracker mortgages, this will help those who will be saving an average of £340 annually with the rate reduction. However, around 700,000 pipeline fixed rate mortgage redeems in the second half of the year might get better rates from the lenders.
This rate cut is the first since the outbreak of COVID-19 in March 2020 up to now. Nonetheless, existing rates are much above those registering between 2008 and 2021, where rates never went past 0. 20-75%, and were as low as 0. 1% until late 2021. With the mortgage rates also following the interest rates up, homeowners have been presented with considerably higher payments, 1. 6 million mortgagors are predicted to face an average of £1,800 uplift each year which was revealed by the Resolution Foundation.
Carsten Jung, senior economist at the independent policy institute, IPPR said it was correct for the Bank of England to cut its interest rates but this was timely. They told him that the extra year at high interest rates has knocked out the recovery in the UK which still languishes at 6% off its pre Covid trend, lagging way behind the United States and the eurozone. As consumers’ inflation expectations normalised and the labour market eased, Jung called on the Bank to guide the market that more rate cuts were to be expected in the forthcoming months.