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The Bank of England decided to hold interest rates steady on Thursday, offering no immediate relief to borrowers. However, it hinted that rate reductions could still be on the horizon, though the scope for significant cuts appears limited. While savers might welcome this potential floor on rates, many borrowers may face less encouraging news.
The Bank’s primary objective remains to reduce inflation to its 2% target and maintain it at or below this level over the coming years. It forecasts subdued economic growth along with a weak labour market in 2024, with unemployment expected to reach 5.3%. This upward revision in unemployment outlook takes into account the impact of policy changes, such as increases in the minimum wage and taxes, which have dampened job creation more than initially anticipated.
Though the Bank acknowledges that interest rates will “likely be reduced further,” the timing is still uncertain. Policymakers must weigh this against persistent price pressures in certain service sectors—hotels, for instance—that may prevent a straightforward path to cuts. The current rates are thought to be near a neutral level, meaning they are neither sufficiently restrictive to fully curb inflation nor accommodative enough to fuel rapid price rises. This Goldilocks zone suggests caution is warranted, so the Bank is unlikely to slash rates precipitously for fear of disrupting a fragile balance.
Economists predict anywhere from one to three additional rate cuts might occur later this year, with some speculating that rate hikes could even resume by 2027. The expected trough for the Bank’s base rate is around 3 to 3.5%, which remains significantly above the ultra-low levels seen before the pandemic. Bank of England governor Andrew Bailey explained that rates during the early 2020s were exceptionally low due to extraordinary circumstances, such as the financial crisis and the COVID-19 pandemic. He emphasized that although some reduction is expected, rates will not return to those historically minimal levels. Another factor influencing this outlook is the inflationary shock stemming from the conflict in Ukraine, which has caused sharp increases in food and energy prices. These cost pressures are deeply felt by consumers and shape inflation expectations, contributing to wage demands and potential future inflation—a risk still weighing on policymakers.
For savers, stable rates above the recent lows could mean avoiding the near-zero returns experienced previously, though financial institutions sometimes reduce savings rates regardless of policy changes. On the flip side, many borrowers are likely to experience higher costs. For example, homeowners ending five-year fixed-rate deals signed during the pandemic period are expected to face higher mortgage rates when refinancing. The Bank estimates that around four million residential borrowers, roughly two-fifths of the total, will encounter an average increase of 8% in their repayment costs over the next few years. Despite some borrowers seeing lower payments, the likelihood of returning to the cheap mortgage deals of the past appears slim
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