The Bank of England have decided to cut interest rates by 0.25%. This has a direct impact on the cost of borrowing money, the rate of return on savings and your investments. In this guide we explain what the BoE interest rate cut means for your finances.
Bank of England Interest Rates
The Bank of England (BoE) are the UK’s central bank. They control the printing of money, provide regulation of other banks and critically set the BoE interest rate to influence spending and manage inflation.
The BoE set the monetary policy for the UK. Under advisement from the government, the Bank of England influence the money in the economy. They primarily do this by setting interest rates. This will dictate the cost of your mortgage, or the return on your savings.
The Monetary Policy Committee meet 8 times a year, on Thursdays, to discuss what the rate should be. They use a collection of financial and economic data to drive their decision making.
What Does the BoE Interest Rate Cut Mean?
Today’s interest rate cut is the first cut in rates since March 2020. For over 4 years the rate has either stayed the same or risen, reaching the peak of 5.25%, the highest since 2007.
On 19th June 2024, the Office for National Statistics released data stating that the Consumer Price Index, a measure of inflation hit its lowest level for 3 years.
The Consumer Prices Index (CPI) rose by 2.0% in the 12 months to May 2024, down from 2.3% in the 12 months to April
Office for National Statistics – Consumer Price Inflation Report, UK: May 2024
This measure means the rate of inflation has hit the government’s target of 2%.
The Bank of England base rate cut means it will now cost less for entities to borrow money from the Bank of England. Entities will also earn less interest on funds. The Bank of England are part of the lending chain, hence UK banks will earn less from the Bank of England with this rate cut.
As a direct result UK banks and lenders will change their interest rates. This may well lag this decision slightly. Rates set by UK banks will also vary depending on other market conditions, however the BoE rate is a huge contributing factor.
How Does the Interest Rate Cut Impact Mortgages?
The BoE rate cut will impact mortgage rates.
Tracker or Variable Rate
For customers on tracker mortgages or variable rates mortgage payments will reduce by 0.25%.
Some customers will be on an agreed term for a tracker mortgage. The rate for this mortgage will tack the Bank of England base rate plus a fixed percentage. As the BoE rate changes, so does the interest rate on the mortgage.
Other customers may be on a standard variable rate. Usually this happens if you take out a fixed deal and it comes to an end. Once this happens you’ll move onto a the SVR. This is usually very expensive, usually 3%+ above the BoE base rate. For most people switching to a new fixed term will save money in the long run.
If you are on a tracker mortgage, expect to pay a little less next month.
Fixed Rate
If you’re on a fixed rate mortgage then I’m sorry to say this rate cut will make no difference to your mortgage payments.
Renewing a Mortgage
If your fixed term is coming to an end and you are looking to renew your mortgage this rate cut will be very welcome. Many borrowers took out fixed rate mortgages when interest rates were much lower. In the last 3 years the Bank of England base rate has soared from 0.1% to 5.25% and with it, so have mortgage rates.
Some customers will see the rate on their next mortgage term increase by an eye watering 500%. On a £200,000 mortgage over 25 years this is an increase of over £500 a month! For those renewing later down the line, the hope is this is the first of many rate cuts.
For many the best advice is usually to try and lock in a new mortgage rate as soon as possible and change later for a better rate if available.
How Does the Interest Rate Cut Impact Savings?
The case of savings is fairly straight forward. Most banks will offer UK savings rates based on the Bank of England rate. With a rate cut announced, expect your bank to lower the interest rate on your savings.
If you are in a fixed term savings account though, your rate won’t change. You may however find out you get a lower rate when locking into a new fixed term.
Fortunately the UK savings market is quite competitive, so you may well see some banks still maintain high savings rates as they compete for customers.
How Does the Interest Rate Cut Impact Investments?
Often interest rate cuts will be favourable for stock markets. Lower rates mean companies can afford to borrow more money and hence grow faster.
Lower rates tend to mean the bond market slows a bit as returns are lower. As a result equities tend to increase in value as people shift more of their portfolio.
The stock market however is full of knowledgeable people, hence many will have already factored in predicted rate cuts into their pricing. As a result you may not see much change.
The FTSE 100, an index tracking the 100 largest companies based in the UK, is also full of large multinational companies.
Consider everyone’s favourite sausage role maker, Greggs. Greggs is predominately UK based hence a cut in interest rates, and thus potentially more consumer spending on sausage rolls is good for Greggs. More customer spending equals more revenue. The challenge is that Greggs is too small for the FTSE 100. The FTSE 100 is made up predominately of large multinational companies. As a result interest rate cuts in the UK don’t necessarily equate to growth in stock value.
From a UK perspective, it’s also important to note that the UK is a tiny portion of the overall world market by market cap. Nvidia has a bigger market cap than the entire FTSE 100. The UK makes up approximately 4% of most market cap weighted global ETFs.
If you are investing in global markets then the Bank of England rate cut is unlikely to have any impact on your investments.
UK Interest Rate Forecast
Forecasting interest rates is a bit of a guessing game, however with inflation appearing to be ‘under control’ experts predict rates will start to come down over the coming year to level out at approximately 3.5-4% towards the end of 2026. Financial experts predict the next rate cut to occur within the next 3 months.
In practice, lenders set rates based on a number of variables including:
- Market competition
- Loan to value ratios
- Length of lending term
- Future rate predictions
As a result deals lenders offer will vary around the base rate.
With rates expected to fall, long term fixed rate deals will likely offer better rates than short term deals. Tracker rate mortgages will likely be higher now than fixed rate deals. As we approach the expected ‘leveling off’ deals will fluctuate.
As always a more favourable loan to value ratio will secure a better rate.
World events will impact then Bank of England base rate. COVID was a great example of this.
Interest Rates Around The World
All major economies set interest rates. There are variations in approach and how the rates are reported.
Earlier this week, the US Federal Reserve, the Fed, have kept interest rates the same, at 5.25-5.5%. It is widely expected the Fed will start cutting rates in September.
On 24th July, the Bank of Canada cut its interest rate by 0.25% for the second consecutive time.
On 6th June, the European Central Bank, the ECB, decided to cut rates from 4% to 3.75% and kept them there at the July meeting.
Most Western central banks are either have or are planning to cut interest rates. Central banks are becoming comfortable with level of inflation and hence need to reduce rates to encourage spending to avoid dipping below the target rate.
Is The Interest Rate Cut Good For Me?
The August 2024 interest rate cut is likely to be polarising.
If you have a mortgage, either a tracker or your fixed rate is coming to an end soon an interest rate cut is likely to be a huge positive for you. A 0.25% rate cut on a £100,000 mortgage will save £20 a month in repayments. Over the course of a 25 year mortgage this saves £6,000.
If however you are mortgage free and have savings, a rate cut will impact the savings returns you receive. If you are a premium bond saver, expect a prize rate cut.
For investors, rate cuts have likely been factored in to market prices, however confirmation of the forecasted rate cut may aid returns. That said, the UK economy is very small compared with the USA hence many investors won’t see much change.
For me, my mortgage is coming up for renewal this side of Christmas and hence this rate cut is welcome news, even if it has already been priced into mortgage rates ahead of the decision.
