In August, The Bank of England cut interest rates to 5% from 5.25%. The first drop in rates since the first Covid lockdown in March 2020. September announced a hold at 5% too. This will affect millions of people's mortgage, credit card, and savings rates. But borrowing costs are still high.
Have you ever thought about why interest rates change?
Bank of England's base rate is what it charges other lenders to borrow money. Hence, customers' loans can be influenced by this number for loans and mortgages. The percentage changes to control UK inflation (the increase in the price of something over time).
Interest rates are used to influence what people can borrow. A high rate reduces the demand for borrowing. So, the higher rates are designed to discourage people from borrowing, and to incentivise saving.
Will the rates drop again?
"Inflationary pressures have eased enough that we've been able to cut interest rates today,” said the Bank of England governor Andrew Bailey following August's rates decision. But, he warned, "We need to make sure inflation stays low and be careful not to cut interest rates too quickly or by too much."
The Bank also considers other measures of inflation when deciding on rates, some of these are higher than liked, such as increasing price rises in the service sector, from restaurants to hairdressers.
So, there must be a balance to slow price rises against the risk of damaging the economy. The banks don’t want to cut rates only to raise them again.
How much could interest rates fall?
Through the UK inflation briefly hit the Bank's 2% target in May and June. It is expected to rise slightly before settling back in early 2025. But with interest rates, it’s hard to predict!
In May, the International Monetary Fund (IMF) recommended that UK interest rates should fall to 3.5% by the end of 2025. They advised the Bank to prioritise controlling inflation before adjusting rates.
But in its latest forecast. The IMF warned that persistent inflation in countries including the UK and the US might mean interest rates have to stay "higher for even longer".
Does this affect you?
According to the government's English Housing Survey, about a third of the population have a mortgage. With over half a million homeowners on a rate that "tracks" the Bank of England's rate. The 0.25 percentage point cut will take monthly repayments down by about £28 on average. Or if you are on a standard variable rate mortgage, about £15.
However, around eight in 10 mortgages are on fixed-rate deals. So, repayments won’t change, but future deals may. According to banking trade body UK Finance, in 2024, about 1.6 million deals are expiring.
Is your fixed-rate mortgage up for review?
Contact us today to see how we can help find the best rate for you.
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Source: https://www.bbc.com/news/business-57764601