The ‘Old Lady’ cuts interest rates: Experts respond

The Bank of England has cut interest rates to 4.75%, in a widely expected move; it’s the second cut in the base rate this year – it came down from 5.25% to 5% in August

The Bank’s base rate heavily influences the cost of borrowing, including people’s mortgages; lower interest rates encourage consumer spending by making borrowing less expensive, and saving less rewarding

Chancellor Rachel Reeves welcomes the cut, but says she is “under no illusion about the scale of the challenge facing households”

The UK’s rate of inflation fell unexpectedly earlier this month and is now below the Bank’s target of 2%

Here experts respond:
 

Rob Morgan, Chief Investment Analyst at Charles Stanley, comments:

 
Expect a more elevated trajectory of UK interest rates following Budget
 
Governor Andrew Bailey’s recent comments the BoE could be “a bit more aggressive” with cuts if inflation data remains favourable are now ringing a little hollow. Even before the Budget it was possibly wishful thinking. Services inflation remains worrisome at 4.9% and wage inflation is running at a similar clip. And now the unveiled fiscal policies look decidedly inflationary, as reflected by OBR forecasts that pencil in above-target price rises for both 2025 and 2026.

By lumping additional costs onto employers in the form of extra national insurance costs on top of minimum wage rises, the Chancellor is reinforcing the trend of escalating costs in the worker-heavy services sector, which plays a huge role in the economy. Wage rises and national insurance costs will result in either lower corporate margins or in price increases to the consumer, and we anticipate more of the latter than the former.

There is also the impact that increasing wages for lower earners has on the rest of the employment market. It could have a ratchet effect of lifting wages across the board owing to read across to more senior roles. However, there are cross currents that cloud the outlook significantly. There is now a greater incentive for companies to do more with less and control employment costs through tempering hours worked, bonuses and benefits, or curtailing hires. So unemployment may end up ticking up at the same time as wages, creating losers among the workforce as well as winners from the Budget fallout.

Fortunately, other trends could help ameliorate the Budget inflationary effect. By freezing fuel duty the Chancellor has removed a separate potential driver from the equation, but it does also help preserve greater household spending elsewhere. There are also question marks around how businesses will respond to the budget more broadly and the ramifications this may have for overall economic growth. Those that choose to retrench will become a drag on output, but there are beneficiaries too from increased government spending. There’s a lot to unpick for the BoE economists.
 
Will interest rates be cut again today? The future trajectory is now more uncertain
 
Previously, Governor Bailey also stated that “interest rates are going to come down. I’m optimistic on that front”. This much still holds true, and it is highly likely the Bank will continue to follow its data dependent path by cutting rates tomorrow. At a pace of 1.7% year on year consumer prices are presently rising slower than the Bank previously forecast.

However, as the reaction of the gilt market has already reflected, there is now significantly more uncertainty around inflation and interest rates going forward, and overall market expectations have shifted higher. There is also likely to be a wider range of views held by the various members of the MPC. Some may feel the inflationary impacts of additional public spending and extra costs foisted onto businesses are at odds with a further cut for the time being. This will not be enough to delay a rate cut but makes a split in the voting likely at today’s meeting.

It will therefore be particularly interesting to inspect the commentary around the decision making and the BoE’s own interpretation of what Budget policies mean. Justifiably, it may state that there are a range of impacts that are yet to be determined and that it will take time to adequately assess these. However, if it does fall into line with what other forecasters are suggesting then interest rate cuts are going to be shallower, slower and fewer than it previously supposed.
 
Lily Megson, Policy Director at My Pension Expert said, “The central bank’s decision to cut rates is a reassuring sign of growing economic improvement. For Britons who have faced the dual pressures of eroding savings due to high inflation and increased borrowing costs, this could signal a period of greater stability, helping people feel more secure about their financial futures.”

“With conditions starting to stabilise, many savers will be exploring ways to strengthen their finances by considering a range of financial products and strategies. Annuities, for example, have gained popularity in recent years as a secure option for locking in a steady retirement income. Before rates start to fall and with pensions now set to be included in the inheritance tax net from 2027, we may see further interest in such products as people weigh up their retirement options. However, it’s crucial that people approach these decisions with caution.

“As we saw with the speculation around the Budget, financial reporting can sometimes drive reactive choices that may not serve people’s best interests. To ensure that their retirement strategies are sound, savers would benefit from seeking guidance from an independent financial adviser who can help navigate these options and make well-informed decisions.”
 
Tim Parkes, CEO of RAW Capital Partners, said: “The main threat to an interest rate cut today was the fallout from the Autumn Budget. The Bank was evidently reassured enough by the reaction of the markets, although the Chancellor’s growth-focussed policies did result in an uptick in the OBR’s inflation outlook, which could have heightened tensions ahead of today’s vote on the base rate.

“Evidently the Monetary Policy Committee (MPC) does not view Reeves’ stimulus as substantial enough to justify delaying cuts, suggesting that we are in a transitionary phase where a more accommodative monetary stance is increasingly favoured on Threadneedle Street. Decelerating wage growth likely supports this view, though it’s important to note that the Budget may slow the pace of future cuts. Indeed, with services inflation still a persistent issue and consumer spending expected to rise over the festive season, the CPI could tick up in the coming months, potentially resulting in a slower pace of base rate cuts than previously predicted.

“That said, the bigger picture is encouraging. Any rate reduction is positive news for the lending and property markets. Although rates may never return to the historic lows seen between 2008 and 2021, they are trending in a favourable direction, making it easier for homeowners and investors to manage both current and future loans. Looking ahead to 2025, we expect specialist finance demand to grow, provided that brokers and lenders can support borrowers with the financial products and expertise they will need to navigate the changing political and economic landscapes with confidence.”

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Paresh Raja, CEO of Market Financial Solutions, said: “The market will breathe a sigh of relief. 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 past few months have provided a timely reminder that the actions of Threadneedle Street typically exert a greater influence on market activity than decisions made in Westminster. 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.

“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.”

On what it means for consumers/savers… 

 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.”

On what it means for mortgages… 

Paul Noble, CEO of Chetwood Bank (formerly Chetwood Financial), said: “This is very welcome news. Following the Budget in which property ownership came under the spotlight, today’s decision brings some positivity to the mortgage market.

“Looking at the bigger picture, there are challenges for landlords to wrestle with, whether that’s the Stamp Duty surcharge, the Capital Gains Tax increase or regulatory reform, but the buy-to-let market has consistently shown itself to be resilient in the face of adversity. Ultimately, it’s the cost of borrowing that will be the major influence on people’s property-buying plans, so today’s cut – and the hope of more – will encourage greater market activity among landlords and homebuyers in the coming months.

“To allow momentum to build, and to effectively support buyers re-entering the market thanks to a falling base rate, it’s crucial that lenders are focused on delivering certainty. Brokers want lenders they can trust and pain-free applications – providing that will be key if the market is to restabilise after all the uncertainty surrounding the Budget.”

Ben Thompson, Deputy CEO, Mortgage Advice Bureau: 

“Another rate cut is starting to move the dial back again in the borrower’s favour, following an eventful week or so since the budget. With the Bank of England opting for another steady .25 cut, we could see swap rates and, consequently, mortgage rates fall, subject to markets settling further following the budget and the outcome of the US election also.

“Our data shows that falling rates have already impacted borrower preference. Last month, over half (54%) of borrowers opted for a five-year fixed rate, an increase of 11% versus the same period last year, clearly showing a change in customer mindset. It will be interesting to look again at this after the dust has settled following the budget and the outcome of the US election, and their combined impact on mortgage pricing.”

Scott Douglas, Director of Capital Markets at international corporate finance firm Centrus, commented: “Though the interest rate cut was to be expected, there are fears that a number of inflationary forces have recently been unleashed.

“The raising of elements such as employer national insurance contributions in the recent budget, and the potential impact of Trump’s victory on the strength of the dollar and import costs, could lead to elevated costs. Consequently, the Bank of England’s rate cutting trajectory could be less steep than anticipated, and higher than expected borrowing costs will impact consumers and businesses – while also weighing on UK bond and equity prices.”
 
Rachel Winter, Partner and Investment Manager at Killik & Co, said: “The drama of the US election has distracted markets from the humdrum of monetary policy in the UK, but this second consecutive rate cut will be good news for mortgage holders and equity markets alike. While the Federal Reserve recently opted for a relatively large 50bps rate cut, the Bank of England appears to be favouring a series a of incremental cuts. This more cautious approach has likely been influenced by the latest Budget, which was described as ‘inflationary’ by the Office for Budget Responsibility.

Lower rates in the UK should be good news for domestically-focused British companies, which are more prevalent in the FTSE 250 than the FTSE 100. That said, the international companies in the FTSE 100 will benefit from the recent strength of the dollar, as they earn revenue in dollars and report their profits in sterling. Markets are still adjusting to the UK Budget and the US Presidential Election, and the longer-term implications remain to be seen. Taking a long-term diversified approach with a balanced exposure to growth opportunities and sectors is the best way to weather any volatility ahead.”
 

Ian Rand, chief executive of Monument comments on today’s interest rate cut: “Today’s Bank of England decision to cut the base rate from 5% to 4.75% will come as welcome news to mortgage holders on variable deals or those looking to find a new mortgage. One in five people we have surveyed say that mortgages will be their biggest financial outgoing over the next years – rising to one in three people in the 35-54 age band. Furthermore, one in 10 currently don’t feel confident their mortgage arrangements are in good order – which is a significant amount of people doubting whether they are on the best deal for them. Today’s rate change will serve as a good reminder for anyone unsure about their current mortgage arrangement to review their options and ensure they are getting the best deal for them and their circumstances.

Monument is the only bank specialising in providing products and services targeting what is often referred to as the mass affluent (people with more than £100,000 in investable assets).