What would an interest rate cut mean for you?
The Bank of England’s Monetary Policy Committee meets next week, with both savers and borrowers waiting to see whether interest rates will be cut for the first time in four years.
Interest rates determine what sort of returns savers can earn on their savings and how much interest borrowers must pay on their loans and mortgages, so if there is a rate cut in August, or later this year, it’s likely to have a significant impact on both.
The Bank is only likely to lower interest rates once it is confident that inflation, or the rate at which prices of everyday goods and services increases, has stabilised. Inflation peaked at 11% in 2022, finally easing to 2% - the government’s long-term target for inflation -in May this year. It remained at 2% in the 12 months to June, although economists had predicted it would slow to 1.9%.
Here, we explain what an interest rate reduction would mean for you, and what the chances are a cut next week.
Impact on borrowers
An August interest rate cut would be great news for borrowers, especially mortgage holders, many of whom are facing a sharp jump in monthly costs when their current mortgage deals come to an end.
Several lenders, including Nationwide, Skipton , Barclays and Santander have reduced some of their mortgage rates in recent weeks in anticipation of an interest rate cut in the next few months, so if you’re due to remortgage soon, or are trying to buy a property, you may be able to benefit from these lower rates ahead of a base rate reduction.
David Hollingworth, associate director at L&C Mortgages said: “Another month’s inflation reading at the Bank’s target rate will buoy the hopes of those wanting a base rate cut sooner rather than later.
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“However, many anticipated a further, even if slight, decline in inflation this month and the likelihood of an MPC decision to cut in August will remain in the balance. Although borrowers can still expect to see base rate fall this year, they should also be prepared for rates to be held a little longer.
“On the upside mortgage rates have been improving in recent weeks. A flurry of price changes is gradually helping to drag fixed rates down, albeit slowly.”
Most lenders will allow you to secure a mortgage deal up to six months in advance, so if you spot a deal you like, it may be worth signing up for it now. You’ll then have peace of mind that you have a deal ready to go, with the advantage that if rates fall, you’ll be able transfer to an alternative deal as there’s still time before your mortgage completion date.
Impact on savers
A rate cut in August would be less positive news for savers, who are currently enjoying some of the highest returns and the widest choice of savings accounts they’ve seen for a while. The number of savings products (including ISAs) on the market rose to 2,014 at the start of July, according to the Moneyfacts UK Savings Trends Treasury Report. Average rates for a one-year fixed bond are currently at 4.65%, while average rates for longer-term term bonds are at 4.16%.
Mark Hicks, head of Active Savings at Hargreaves Lansdown, said: “With inflation staying at 2% and coming in slightly ahead of expectations it’s a perfect scenario for savers. This will still ensure that the Bank of England decision in August is finely balanced, which means the savings market should remain relatively steady, as it has done all year.
“Both easy access rates and fixed terms have started to creep up in July, driven by intense competition at the top of the market which savers should be taking full advantage of. Savers are consistently getting above double the rate of inflation returns and this increases the attractiveness of holding cash in your portfolio.”
If rates are cut, savers with variable rate accounts are likely to see their returns fall. Rachel Springall, finance expert at Moneyfactscompare.co.uk, said: “Some variable sectors are already seeing reductions, with average easy access rates declining to 3.11% between June and July.
“As a result, it’s worth reviewing your savings to ensure you’re getting a good rate, and not missing out."