The Bank of England has cut interest rates to their lowest level in almost three years.
On Thursday, the Monetary Policy Committee voted 5-4 in favour of cutting the rate from 4% to 3.75%, marking the fourth cut of the year and the lowest level since February 2023.
While the cut was widely expected, following a slowdown in inflation and weak GDP, commentators said the narrow vote makes future cuts far less certain.
In its Monetary Policy Statement, the Bank of England said: “CPI inflation has fallen since the previous meeting, to 3.2%. Although above the 2% target, it is now expected to fall back towards target more quickly in the near term.
“Monetary policy is being set to ensure CPI inflation settles sustainably at 2% in the medium term, which involves balancing the risks around achieving this. The extent of further easing in monetary policy will depend on the evolution of the outlook for inflation. On the basis of the current evidence, Bank Rate is likely to continue on a gradual downward path. But judgements around further policy easing will become a closer call.”
Emma Wall, chief investment strategist at Hargreaves Lansdown, said: “What has surprised markets is how tight the vote was, making the path from here far less certain. While inflation is falling, it is still far above the Bank target of 2%, and the MPC voting record revealed that four members favoured a hold today – likely because of these pricing concerns.”
Laith Khalaf, head of investment analysis at AJ Bell, commented: “Inflation is now expected to fall back closer to the 2% target in the spring, which would be a real boost to consumers. But this has failed to significantly move the dial for some members of the rate setting committee. The vote to cut rates was still close, with four members wanting to hold rates at 4%.
“That suggests they may be worried about a U-shaped trajectory for CPI, settling at a rate above 2% in the medium term. Indeed, even though the effects of the Budget are disinflationary in the short term, they are expected to push inflation up a touch in 2027 and 2028. It seems clear that wage inflation is a major concern for the hawks in the Bank of England, so that is a key metric to watch going forward for an indication of where monetary policy might be heading.”
Mixed picture for mortgages, savings and pensions
Lower rates pose good news for mortgages, with those on tracker and variable-rate deals likely to benefit first.
Mike Ambery, retirement savings director at Standard Life, said: “For households, the immediate impact will be felt most clearly by borrowers. Those on variable rates or approaching the end of a fixed mortgage or loan deal should start to see some relief as lenders gradually pass on lower rates.
“That said, further cuts aren’t guaranteed to come quickly. With policymakers signalling caution about how far and how fast rates can fall, this is a sensible moment for borrowers to review their options and make sure they’re on a deal that suits their circumstances.”
The picture looks more challenging for savers who are likely to see their rates fall, with many providers having already reduced savings rates in anticipation of a cut.
Ambery said: “As rates fall, returns on cash savings will likely drop too, and with inflation still above target, your money could lose value over time. It’s sensible to keep some easy-access cash for everyday needs and emergencies, but once that’s covered, relying on cash alone might not be enough.
“Looking at longer-term options – such as pensions or other investments – can help your money work harder, protect its value, and support your financial security as the interest rate landscape shifts.”
Clare Moffat, pension and tax expert at Royal London, said: “Financial pressures remain high, and for savers, lower rates could mean reduced returns on cash savings. It’s essential that savers shop around to see if there is a better rate available. Building resilience through budgeting, maintaining an emergency fund, and seeking advice on long-term planning remains crucial.”
For pension savers, an interest rate cut can have very different effects across the pensions landscape. For defined benefit schemes, lower rates tend to increase transfer values.
For those with defined contribution pensions, rate cuts can be supportive of growth assets such as equities but may also weigh on bond yields, said Quilter. Annuity rates, which have risen significantly in recent years, remain closely linked to gilt yields, meaning any sustained move lower in rates could reduce the income available to new buyers.
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