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Last week, the Bank of England cut interest rates to 4.75% from 5% which had been widely anticipated. However, it appears that the Bank of England is wary of making too many rate cuts too quickly given that the extra spending outlined in last week’s Budget could raise prices at a faster rate than the Bank initially anticipated, which could ultimately push inflation above its target rate of 2%. Measures outlined in the Budget such as raising the cap on bus fares and VAT on private school fees will also push prices up at a faster rate. With Bank Governor Andrew Bailey indicating that rates are expected to fall gradually from this point, the bank is particularly cautious about making any drastic cuts in rates given the many risks that are still present both domestically and in the global economy.
Investors do not expect any further rate cuts this year and forecast a rate cut to 3.5% in early 2026; this is slower than previous predictions. Inflation measures the pace of price rises and fell below the Bank’s 2% target in the year to September. However, due to the increase in gas and electricity prices, it is expected to rise once more and then drop back to 2% by 2026. The Bank of England’s rate setting body, the Monetary Policy Committee, voted 8-1 in favour of the cut, but Catherine Mann voted to keep rates on hold citing the impact of the Budget on inflation as one of the reasons.
As expected, the Bank’s interest rate affects the rates which are offered by High Street banks and other money lenders for a wide variety of products such as loans and credit cards. In theory, more than one million mortgage borrowers on tracker and variable deals are expected to see an immediate reduction in their monthly repayments. However, it’s worth noting that mortgage rates remain higher than they have been for much of the last decade. The average 2-year fixed mortgage rate is currently 5.4%, whilst a 5-year deal is slightly more favourable at an average rate of 5.11%.
Last week’s Budget also included plans to borrow an additional £28bn a year along with £40bn in tax-raising measures. The most significant measure was the increase in National Insurance contributions paid by employers which could lead to a slower pace of wage rises for employees as businesses pass on the additional cost of the employer NI contributions by raising prices.
As a result of the Bank’s cautious approach to cutting rates, it’s expected that savers are more likely to see a reduction in the returns offered by banks and building societies. Savers should shop around for the best account for their needs as loyalty to a specific bank may not necessarily be rewarded with the most favourable interest rate. Whilst charities suggest that building up savings is essential, however tight a budget may seem, investing in higher interest accounts that require you to lock your money away for a longer period of time is not for everyone
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