Following its latest meeting in November, the Bank of England has officially cut the base rate from 5% to 4.75% - the second cut this year after it dropped to 5% in August.
This is major news for all of us, especially as the base rate effectively influences the lending and savings rates of high street banks throughout the UK. Below we explore why the base rate has been cut once again and what that means for you, your savings and your lending rates.
Why was the Base Rate cut?
The Bank of England (BoE) uses the base rate as a way of controlling inflation - the increase in the price of something over time. According to Government guidelines, it’s the BoE’s job to ensure inflation remains around 2% under the ‘Consumer Prices Index’ (CPI) measure.
So what does this mean in practice? Typically, when inflation is high, the BoE raises interest rates to keep inflation around that 2% mark. The idea is that people spend less which reduces demand and thus, brings inflation down.
As soon as this process happens the Bank may then freeze or cut rates to ensure balance is maintained.
As of September 2024, CPI inflation figures suggested inflation had fallen to 1.7%, the lowest it's been since 2021. Since this is below the BoE target, the base rate is being cut by 0.25 points to 4.75%.
What does this mean for mortgages?
So what does this mean for you on a day-to-day level? As always, whenever the base rate is cut, it has a knock-on effect for lenders. While it’s impossible to list how every mortgage product offered by all of the high street banks will change, here’s a general overview of what to expect:
1. If you’re on a fixed-rate mortgage you’ll see no real change. Changes to the base rate don’t impact the rate you pay during your fixed period, although if your deal is ending soon it’s worth revisiting the market. If you don’t set up a new deal, you’ll likely end up on a lender's standard variable rate (SVR), which may be more expensive.
2. If you’re on a tracker mortgage or variable-rate mortgage that follows the base rate, your mortgage rate will decrease, meaning your monthly payments will also change depending on the repayment date.
3. If you’re on a lender’s standard variable rate, your mortgage rate may also change, although this can change entirely based on your lender’s market outlook so it may be worth either getting in touch with your lender or looking for a new deal, whether it’s fixed or tracker.
In this situation, the people facing the biggest changes are the people either on a tracker mortgage or those that are coming to the end of their fixed period. How you approach a new deal entirely depends on you, so it’s worth getting some financial advice if you’re unsure.
You may consider moving onto a tracker mortgage that doesn’t have early repayment charges, which means if rates do come down again, you can lock in a cheaper fixed deal with no penalties. Just remember that at the time of writing, tracker mortgages are generally 1% more expensive than the cheapest fixed products.
What does this mean for my savings?
With the cut in August and now a further cut this week, savings rates have fallen across the board during 2024. Expect somewhere between 4.7% and 5% as a benchmark for savings rates over the next few weeks.
Remember that the BoE may cut the base rate further to stabilise the inflation target, so it’s worth looking at your options to ensure you’re maximising your savings.
Will the Base Rate be cut again?
The Base Rate sat at 5.25% going into this year, the highest level it’s been at for 16 years. Now, following two cuts, it’s sitting at 4.75%. While we can’t predict exactly what the Bank of England will do, it’s worth noting that they’re meeting in December, which could precede another cut.
Also note that inflation is far lower than the peak of 11% we saw in 2022 and the CPI rose by 1.7% in September 2024, down from 2.2% in August 2024 and obviously below the 2% benchmark.
That said, according to the Office for Budget Responsibility, measures announced in the Autumn Budget - such as increased Government spending - means the CPI rate of inflation is expected to rise to 2.6% next year, meaning higher prices for consumers.
If this happens it’ll significantly slow down the need for any base rate cuts, with some experts even suggesting we won’t see changes now until early 2026. As always, a lot can change from month to month so it’s worth keeping an eye on the news and how rates are changing.
