Sarah Pennells, consumer finance specialist at Royal London said: “Finally, after a year of Base Rate holding firm, the Bank of England has made the decision to lower the rate by 0.25 percentage points.
“This is the first time the rate has reduced since it was dramatically cut to 0.1% in April 2020 and will be welcome news for mortgage holders who will now be hoping this rate cut is followed by others in the coming months. We know that many homeowners have been struggling with the effects of high interest rates. Our latest Financial Resilience research showed that those with a mortgage have been paying £362 more in housing costs a month when compared with the same time a year ago. Worryingly, 1 in 8 of those whose mortgage costs had risen were planning to use either a credit card or overdraft to cover the additional cost.
“Ahead of this reduction, lenders have been making cuts to the on-sale mortgage rates with a number of big-name lenders announcing lower rates through the last week. This will be a welcome reprieve for borrowers who were worried about remortgaging to a, possibly, much higher rate.
“Although savings rates have been favourable more recently, it will be interesting to see how providers react to this change in Base Rate. It's vital that savers shop around to see whether there is a better rate available for them if they start to see the interest rate on their current savings account reduced.”
Chris Arcari, Head of Capital Markets, Hymans Robertson says: “With the Bank of England 0.25% pa rate cut announced today, we think the key point is that the pace of rate cuts from here is likely to be very gradual given the current decent growth backdrop and stickiness in underlying measures of inflation.
“While headline inflation has been at the BoE’s 2% target in May and June, energy prices mean it is likely to rise in the second half of the year and is forecast to reach close to 3% by the end of 2024. Furthermore, recent data on GDP growth, services inflation, and wage growth have all exceeded the Bank of England’s forecasts recently, which, all else equal, weighs against the BoE cutting rates.
“Nonetheless, lowering rates need not mean adopting a stimulative stance – given falls in inflation, monetary policy has continued to tighten through 2024 via rising real rates, despite the last rate rise coming in August last year. Put another way, higher than expected, yet easing, underlying inflation pressures can be seen to be consistent with a gradual reduction in interest rates to slightly less restrictive levels over time.”
Dean Butler, Managing Director for Retail Direct at Standard Life, part of Phoenix Group said: “This is a big moment as the Bank of England changes course and cuts rates for the first time since March 2020. After holding the base interest rate steady for a year, today’s 0.25% cut to 5% marks a milestone as the UK emerges from a prolonged cost of living crisis. While much predicted, its significance shouldn’t be underplayed – mortgage holders, particularly those on a tracker rate or approaching the end of a fixed period, and people with unsecured loans like credit card debt will welcome the positive impact on their repayments. Savers are likely to be less pleased – while there are some cash savings deals still hovering around 5%, these are likely to fall off as banks react to today’s news and price in potential further rate drops later this year.
“It’s worth anyone with savings having a real look around at the market now. Based on the current 2% level of inflation, someone with £10,000 to save into cash who snapped up a 5% deal could see their pot worth £10,588 in real terms after two years. Someone who waited until rates dropped further and secured a 3% deal could end up with £10,189 in real terms after two years, £400 less.
“Any gains will still be relatively marginal. For those with a greater appetite for risk, investing into a product like a stocks and shares ISA offers a greater chance of substantial returns. If you’re able to take a longer-term view, saving into your pension is both incredibly tax efficient and has the potential to outpace inflation over a number of years due to the power of compound investment growth.”
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