First Interest Rate Cut Since 2020: What It Means for Mortgages
Posted on Thursday, 1 August, 2024
The Bank of England (BoE) has announced it will lower the Base Rate to 5% this month, marking a 0.25% reduction and the first cut in four years. The Base Rate had been steady at 5.25% since August 2023, following 14 consecutive increases.
The Bank had been raising and maintaining rates to combat high inflation, which exceeded 10% in early 2023, significantly above the government’s 2% target. In June, it was reported that inflation had decreased to the target rate of 2%, and this level was maintained in July.
Speculation about today’s vote had been widespread, with markets predicting an equal likelihood of holding the rate or a 0.25% cut.
The mixed opinions on whether the Bank would hold or reduce rates today were due to ‘service inflation’ remaining persistently high through June. This type of inflation pertains to ‘services’ like hospitality and culture, as opposed to ‘goods’ found in shopping baskets.
The Bank aims to balance reducing inflation with maintaining overall economic health. This rate drop indicates the Bank’s confidence in its inflation control strategy. Continuing to hold rates could negatively impact businesses and households in the future.
What’s Happened to Mortgage Rates Recently?
In January, an unexpected rise in inflation caused mortgage rates to increase throughout the spring. However, with positive inflation news in recent months, bringing it back to the 2% target, mortgage rates have stabilized.
With the certainty provided by a new government and competitive mortgage lenders, mortgage rate reductions have accelerated recently. Notably, we saw the first sub-4% rate in many months for borrowers with larger deposits, and more lenders are expected to follow.
The average 5-year fixed rate has decreased from 6.08% in July 2023 to 4.87% this week, and the average 2-year fixed rate has dropped from 6.61% in July to 5.25%. You can check the current average mortgage rates for various terms and deposit sizes here, which we update weekly.
