Bank of England holds Base Rate at 5% fuelling more pain for homeowners

The Monetary Policy Committee (MPC) convened this afternoon to announce its highly anticipated decision about interest rates.

By Katie Elliott, Senior Personal Finance Reporter based in London, Conor Wilson, News Reporter

Bank Of England Ahead Of Interest Rate Decision

The Bank of England is expected to maintain interest rates. (Image: Getty)

The Bank of England has decided to hold the Base Rate at five percent for the second consecutive month, with a majority vote of 8-1.

The move will exacerbate the financial strain on homeowners, who are already grappling with mortgage payments that have increased by hundreds of pounds.

Andrew Bailey, governor of the Bank of England, said on Thursday: "Inflationary pressures have continued to ease since we cut interest rates in August. The economy has been evolving broadly as we expected. If that continues, we should be able to reduce rates gradually over time.

"But it's vital that inflation stays low, so we need to be careful not to cut too fast or by too much."

After inflation remained at the Government-set target of two percent for consecutive months, the MPC cut interest rates from 5.25 percent to five percent on August 1, the first rate reduction in four years.

However, the downward trend has since reversed, with inflation rising to 2.2 percent in July and remaining unchanged in August, according to the Office for National Statistics.

The Consumer Price Index (CPI) is a key metric for MPC decisions, and its stubborn month-on-month inflation rate left analysts widely expecting this result.

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The pound hits two and half year high

Sterling has highs not seen since March 2022. Kyle Chapman, FX Markets Analyst at Ballinger Group, said: "The Bank of England has delivered a cautious hold at five percent this afternoon. But this was by a more decisive and more hawkish vote than expected at 8-1, supporting gilt yields and lifting sterling to a fresh 30-month high above 1.33.

"This meeting reads rather like a lead-up to a cut in November, and a continued quarterly pace thereafter. The relatively quiet inter-meeting period means that they are reserving full judgment of the economic situation until the next set of forecasts arrives in a few months, and I think there will be enough evidence of cooling to justify a second move.

"As always, very little is being given away in the forward guidance, and the ‘meeting-by-meeting' rhetoric has stuck, but the promise of a ‘gradual approach’ should give confidence in another cut or two before the end of the year.”

Why the MPC voted to keep interest rates held at 5% today

The minutes of the Bank's meeting outline that the decision to hold the Base Rate at five percent was influenced by steady global growth, stable UK economic indicators, and concerns about inflation persistence.

Despite a slight dip in private sector earnings and global market adjustments, the Committee believes a cautious approach is necessary to ensure inflation continues to fall back towards its two percent target.

The Bank explained: "Since the MPC’s previous meeting, global activity growth has continued at a steady pace, although some data outturns suggest greater uncertainty around the near-term outlook. Oil prices have fallen back, reflecting in large part weaker demand. Market-implied paths for policy rates across major advanced economies have declined.

"There has generally been limited news in UK economic indicators relative to the Committee’s expectations in the August Monetary Policy Report. Headline GDP growth is expected to return to its underlying pace of around 0.3 percent per quarter in the second half of the year. Twelve-month CPI inflation was 2.2 percent in August, and is expected to increase to around 2½ percent towards the end of this year as declines in energy prices last year fall out of the annual comparison. Services consumer price inflation remained elevated at 5.6 percent in August. Private sector regular average weekly earnings growth declined to 4.9 percent in the three months to July.

"In the absence of material developments, a gradual approach to removing policy restraint remains appropriate. Monetary policy will need to continue to remain restrictive for sufficiently long until the risks to inflation returning sustainably to the two percent target in the medium term have dissipated further."

8-1 MPC vote shows Bank needs to see 'further slowdown' before rates can fall lower

Ed Monk, associate director for personal investing at Fidelity International, said the 8-1 MPC vote to hold rates is a "surprise" given recent economic data has shown growth slowing.

He explained: "That created some expectation that rates could be cut this month but the strength of the vote to hold them perhaps suggests that the Bank sees a period of below-potential growth as being necessary to get the last bit of high inflation under control. It means borrowers will have to be patient in their wait for rates to fall, even if that is now the direction of travel."

Expectations for where rates will land have been moving lower as the year has progressed.

Mr Monk continued: "Market prices ahead of the announcement suggested rates will dip below four percent within 18 months. With inflation sticking slightly ahead of target and expected to rise again this year before settling, real returns from cash are likely to be lower than has been the case over the past two years.

“That makes now a good time for investors to reassess their balance of cash versus investments. The two do different jobs in your financial mix and it makes sense to hold both, however many will have jumped on the high returns available recently from cash and shifted assets away from investments.

"That plan has largely worked in the past two years as inflation-adjusted returns from cash have been strong, although still lagging the stock market in that time. Over longer periods, however, investing in assets like shares and bonds has a better record of producing inflation-beating returns than cash. “

Savers have 'prime window' to lock in higher interest rates, according to analysts

Adam Thrower, head of savings at Shawbrook said: “Savers have a prime window to lock in higher savings rates as the Bank of England holds rates this month—but time is running out. With rates likely set to fall soon, the next few months are crucial for securing inflation-beating returns."

Demand for long-term fixed rate accounts is growing but according to Shawbrook Bank's research, near-retirees (aged 55 to 68) may be missing out.

Mr Thrower explained: "Our research shows only 18 percent see these accounts as a source of regular income, yet 34 percent want their savings to boost retirement funds. Locking in now could be a smart move for financial security.”

Money in hand

Savers have 'prime window' to lock in higher interest rates, according to analysts (Image: GETTY)

Home-movers should continue to see downward trend in mortgage rates, says Rightmove

Reacting to today’s Bank Rate hold, Matt Smith, Rightmove’s mortgage expert said: “We’re still expecting two rate cuts before the end of the year, and home-movers should continue to see a downward trend in mortgage rates this side of Christmas.

"I think overall, there’s likely to be quite a moderate response from lenders in response to today’s news – and whilst rates should continue to come down, mortgage lenders’ funding costs are unlikely to come down significantly, which wouldn’t leave heaps of room for dramatic mortgage rate cuts."

However, he noted: "We’ll monitor how things play out over the coming days, and I think we could see a mixture of some lenders holding rates while others cut further to drive up pre-Christmas business.

"Overall, I think there’s an optimistic mood about where we’re heading, and lowering mortgage rates is supporting the increased home-moving activity we’re seeing right now, particularly against last year."

For sale sign next to house

Home-movers should continue to see downward trend in mortgage rates,, says Rightmove (Image: GETTY)

Speculation of November Base Rate cut grows...

Alpesh Paleja, interim deputy chief economist at the Confederation of British Industry, said he expects an interest rate cut in November.

He said: "Monetary policy will be walking a fine line for a little while yet: between balancing upside risks to inflation, but not being too tight so as to choke off activity.

"Developments in fiscal policy in October's Budget will also be a key consideration for growth prospects.

"We still anticipate another rate cut in November, and a few more next year, in line with the MPC (Monetary Policy Committee) moving at a slow but steady pace.

"On their own, lower interest rates will be a welcome respite to households and businesses."

‘No need to panic’, says Purplebricks Mortgages

Jo Pocklington, MD of Purplebricks Mortgages said: “There’s absolutely no need for homeowners to panic about the base rate being held today. Mortgage rates are nothing like what they were two years ago and there’s no reason to believe they’ll return to the levels seen by the end of 2022 any time soon.

“Given it was a close call on whether the Bank of England would drop the base rate in August, it’s not a huge surprise to see rates held for September.

“I imagine the fact that inflation remained steady yesterday gave the BoE reason for caution, but they are expected to continue a measured reduction of the base rate this year, and into 2025.

“If you’re trying to buy, move or refinance your home, my best advice is to prioritise speaking to a good and trusted broker.”

Property industry reacts to unchanged interest rate...

Guy Gittins, chief executive officer at Foxtons Group believes that, despite interest rates remaining unchanged, the property market still stands in good stead. He said: “The nation’s homebuyers will have understandably been hoping for a second consecutive rate reduction today, having already responded favourably to what was the first cut in four years at the start of August.

"Since then, we’ve seen an increase in buyers entering the market by way of strengthening mortgage approval numbers and they are doing so with far greater confidence, which is helping to cultivate a consistent level of upward house price growth.

"Whilst rates have been held today, this improving market momentum is only likely to strengthen further, as mortgage rates continue to trend downwards, putting the property market in very good stead for the remainder of the year.”

Jonathan Samuels, CEO of Octane Capital, commented: “The mortgage sector has been responding well to the market certainty that followed the Bank of England’s initial decision to hold rates at 5.25 percent and this market sentiment has only improved further following the base rate reduction seen at the start of last month.

"As a result, we’re not only seeing the rates offered on many products reducing, but the range of products available is also growing, with this greater level of choice helping more buyers to enter the market.

"Today’s decision to hold interest rates at five percent is unlikely to dent this growing market positivity and we expect more buyers to be tempted back into the fold, while the overall health of the UK property market will continue to strengthen.”

Row of houses in London

Property industry reacts to unchanged interest rate (Image: GETTY)

Bank makes ‘another mistake’ by holding rates, says Devere CEO

The Bank of England has made “another mistake” by not accelerating interest rate cuts, says Nigel Green, CEO of independent financial advisory and asset management firm Devere Group.

Mr Green said: “This is no time for hesitation. The Bank of England’s decision to pause rate cuts is a missed opportunity. We believe they need to adopt an aggressive approach now to further lower borrowing costs, drive growth, and restore confidence in the UK economy.”

He continues: “Holding interest rates steady may seem like a cautious move, but it fails to address the urgent need to support economic recovery and competitiveness.

“High borrowing costs continue to burden businesses, particularly in key sectors like manufacturing, retail, and housing, where investment has slowed, and costs remain high.”

Interest rates to be reduced 'gradually over time', says Bank of England Governor

Andrew Bailey, governor of the Bank of England, said on Thursday: "Inflationary pressures have continued to ease since we cut interest rates in August. The economy has been evolving broadly as we expected. If that continues, we should be able to reduce rates gradually over time.

"But it's vital that inflation stays low, so we need to be careful not to cut too fast or by too much."

Andrew Bailey

Interest rates to fall 'gradually over time', says Bank of England governor (Image: GETTY)

Policymakers split 8-1 on interest rate vote

The Bank's policymakers voted 8-1 to keep the Base Rate at five percent.

Swati Dhingra voted for a cut to 4.75 percent. However, the other eight members—Andrew Bailey, Sarah Breeden, Megan Greene, Clare Lombardelli, Catherine L Mann, Huw Pill, Dave Ramsden, and Alan Taylor—all supported maintaining the current rate.

The Bank indicates cuts 'before end of year'

The Bank of England has indicated it could implement more cuts before the end of the year, fueling hopes for a reduction in November or December's meeting.

The Bank of England holds Base Rate at 5%

The Bank of England has decided to hold the Base Rate at five percent for the second consecutive month.

FTSE 100 hits highest level in two weeks

Stocks in London are climbing, driven by the recent US interest rate cut, which has boosted investor sentiment.

The FTSE 100 has risen by 109 points, or 1.3 percent, to 8,363, marking its highest level in over two weeks.

European markets are also gaining ground, with Germany’s DAX reaching a new all-time high, adding 0.8 percent.

A Base Rate cut at noon looks increasingly unlikely as odds fall...

Currently, the probability of the Bank Rate being reduced to 4.75 percent stands at just 17 percent, a decrease from 20 percent earlier today and nearly 40 percent earlier this week, according to futures pricing.

The likelihood of maintaining the Bank Rate at five percent is significantly higher, at 83 percent.

US Fed cuts may give MPC 'confidence' for more 'aggressive' reductions later in year

A spokesperson from industry data platform Stocklytics said the above-expected cut from the US Federal Reserve on Wednesday could give the bank some confidence, but members will still be ‘cautious’.

Subsequently, the MPC may “cut more aggressively” later in the year.

A spokesperson from Stocklytics said: “The US Federal Reserve's above-expected rate cut of 0.5 percent last night may fill some with confidence the Bank of England may follow, but most experts agree the UK's central bank will be more cautious than its US counterpart.”

However, they noted: “This may mean the Bank of England will be able to cut the rate more aggressively later in the year. But borrowers will want security as soon as possible, especially ahead of the expensive Christmas period.”

“No one will be looking at the Bank of England today with more interest than homeowners. With the average mortgage repayment increasing between £500 to £1,000 in 2024 alone, anything that brings down interest rates will have a positive impact on first-time buyers and existing homeowners.”

Norway leaves interest rates on hold

Norway's central bank, Norges Bank, has decided to keep interest rates steady and is not anticipating any cuts before 2025.

At its recent meeting, the Norges Bank’s Monetary Policy and Financial Stability Committee maintained the policy rate at 4.5 percent. The rate has been on hold since last December.

Governor Ida Wolden Bache commented: "We believe that there is a need to keep the policy rate at today’s level for a period ahead but that the time to ease monetary policy is approaching"

Norges Bank

Norway leaves interest rates on hold (Image: GETTY)

How did the last Base Rate cut impact savings account interest rates?

According to Moneyfactscompare, average rates across easy access, notice and their Cash ISA equivalents have fallen month-on-month. However, they still remain higher than a year ago.

The average easy access rate has fallen from 3.15 percent since August 2024. Meanwhile, the average easy access ISA rate has fallen from 3.36 percent.

In September 2023, the average easy access account rate was less than three percent, at 2.96 percent, the average easy access ISA rate was slightly higher at 3.04 percent. Since the start of March 2024, the average easy access savings rate has fallen from 3.18 percent to 3.08 percent and the average easy access ISA rate fell from 3.32 percent to 3.29 percent.

In September 2023, the average notice account and notice ISA rates were 4.14 percent and 3.89 percent, respectively.

The average notice rate is now 4.23 percent, down from 4.28 percent in March 2024 and the average rate on a notice ISA has fallen from 4.15 percent to 4.08 percent. The average notice rate and average notice ISA rate fell month-on-month.

Moneyfactscompare's Rachel observed: “The savings market has seen several brands cut variable rates since the Bank of England base rate cut last month, but not every provider has slashed rates by the full 0.25 percent.

“Savers would be wise to review their pots considering the base rate cut to ensure its still paying a competitive return. Easy access accounts remain a popular choice among savers for their flexibility, but the convenience of using one of the biggest high street banks can come at a cost.

“The average easy access rate paid across the biggest high street banks is 1.93 percent, which is less than the current market average easy access rate across all savings providers. Loyalty does not always pay, so savers would be wise to seek out the top rates from the more unfamiliar brands.”

Ms Springall also noted that there is an expectation that base rate will be cut twice more before the year is over, so savers “need to prepare themselves” for more interest rate cuts.

She continued: “Those who are happy to lock their cash away for a guaranteed return could look towards a fixed rate bond or fixed Cash ISA, and with rates expected to decrease further, savers may wish to choose a longer-term deal.

“Challenger banks and building societies continue to offer some of the top returns and have the same deposit protections in place as the more familiar high street banks, so there is little reason to overlook them in favour of a well-known brand. Whichever account savers decide to open, its essential they pick one that suits their needs, but if it’s an easy access account, make time to review the rate regularly.”

Woman with piggy bank

How did the last Base Rate cut impact savings interest rates? (Image: GETTY)

How did the last Base Rate cut impact mortgage interest rates?

Moneyfactscompare has analysed the average rates offered across mortgages since the last Base Rate cut in August.

Mortgage rates have fallen since August

The average standard variable rate (SVR) has fallen below eight percent for the first time since August 2023 (7.85 percent). It stands at 7.99 percent, down from 8.18 percent in March 2024.

According to Moneyfacts, many lenders have moved to pass on last month’s 0.25 percent base rate cut, seeing the SVR fall from 8.16 percent since the start of August 2024.

In September 2023, both the average two- and five-year fixed rates were above six percent, at 6.7 percent and 6.19 percent, respectively. Since the start of March 2024, the average two-year fixed rate has fallen from 5.76 percent to 5.56 percent and the average five-year fixed rate has fallen from 5.34 percent to 5.2 percent.

These average rates have fallen from 5.77 percent and 5.38 percent respectively since last month.

Rachel Springall, finance expert at Moneyfactscompare.co.uk, commented: “The mortgage market has seen a bustle of activity over the last month, with the Bank of England base rate cut, and a more favourable swap rate market, creating a positive influence on fixed rate pricing.

“There have also been several lenders passing on the 0.25 percent base rate cut to customers, leading to the Standard Variable Rate (SVR) falling below eight percent for the first time since August 2023. The expectations for another base rate cut are mixed, but it looks more likely that the next drop could come in November, which is after the Budget.”

New or existing borrowers will ideally want to see mortgage rates fall further in the months to come, particularly if they are about to come off a cheap fixed deal.

Ms Springall continued: “Any borrower looking at their options today for peace of mind could lock into a fixed mortgage early, but it would be understandable for some to adopt a ‘wait and see’ approach, hoping rates will come down by bigger margins.

“However, when falling off a cheap rate onto a revert rate, borrowers will typically see their monthly repayments rise, so seeking advice to weigh up all their options before their deal ends is essential. A typical mortgage being charged the current average SVR of 7.99 percent would be paying £383 more per month, compared to a typical two-year fixed rate.”

While afordability remains a key issue for borrowers, particularly first-time buyers, overall average mortgage rates are s”lowly dipping down” to levels not seen for around six months.

Ms Springall concluded: “This month also marks the two-year anniversary of the fiscal announcement, so any borrowers about to come off a two-year fixed deal may be pleased to see the market is much more stable and lenders continue to chop rates to entice new business.”

Woman looking in estate agent's window

How did the last Base Rate cut impact mortgage interest rates? (Image: GETTY)

MPC to signal further rate cuts this year, but at more 'gradual' pace, economists suggest

Chris Arcari, head of capital markets at Hymans Robertson suggested the next cut could take place in November, and possibly also in December.

Breaking down the recent inflation and "disinflation" figures, Mr Arcari said: "On the one hand, headline inflation remained unchanged in August, at 2.2 percent year-on-year, while a weakening PMI output price balance points to inflationary pressures subsiding.

"However, on the other hand, core inflation rose more than expected, to 3.6 percent year-on-year in August, from 3.3 percent in July."

While solid growth continues to support strong labour markets, the year-on-year pace has slowed in recent months. Despite this, average earnings (excluding bonuses) still rose by 5.1 percent year-on-year in the three months leading up to July.

Even with optimistic assumptions about productivity growth, Mr Arcari noted that this rate of wage increase is too high to align with the Bank of England’s two percent inflation target.

Mr Arcari continued: "Low unemployment and solid wage growth are, in turn, keeping inflation in the more labour-intensive services sector elevated which, rose to 5.6 percent year-on-year in August, from 5.2 percent in July."

Mr Arcari continued: "Given the mixed bag of ongoing disinflation, but from elevated levels and with signs of stubbornness in some key measures, we still think the BoE is likely to signal further rate cuts, but at a gradual pace that slowly makes policy less restrictive, as opposed to adopting stimulative settings.

"Slightly further out, the market is already pricing a fair degree of further cuts, anticipating the bank rate to fall to 3.3 percent pa by the end of 2025."

FTSE 100 rallies, boosted by Fed rate cut

The FTSE 100 surged this morning, buoyed by the Federal Reserve's rate cut and strong performance from Next.

London’s blue-chip index climbed 71 points, or 0.85 percent, reaching 8,325 points, nearing a two-week high. Next's shares soared by 5.5 percent to a record £109.10 after raising its profit forecasts, with other retailers also seeing gains.

How interest rates have changed since the last financial crash

Here's a timeline of Base Rate changes since 2007.

Interest rate timeline

How interest rates have changed since the last financial crash (Image: PA)

MPC voters 'have to consider' strengthening the pound - a cut could crash it

If the Bank of England surprises with a cut on Thursday, we could see a "noticeable drop" in sterling, Russell Gous, editor-in-chief of TopMoneyCompare, suggested.

He said: "Thursday’s base rate decision has split opinions once again. Earlier this week, markets were predicting a 40 percent chance of a rate cut but today's inflation data has reduced the probability.

!UK inflation held steady at 2.2 percent in August, but core inflation did jump to 3.6 percent. With this in mind, it's likely that committee members will see this as enough of a reason to hold the rate steady, especially when you consider that the BoE has forecasted a rise in inflation at the back end of the year."

"That said, growth was sluggish in Q2 for the UK economy, and MPC voters will have to consider the impact of a strengthening pound. Sterling’s recent performance—near its highest level against the dollar since 2022—serves to make UK exports more expensive. A stronger pound could slow growth, making it more difficult for the BoE to hold off on cuts for long.

"If the BoE surprises with a cut on Thursday, we could see a noticeable drop in sterling, similar to the dip seen in early August when the pound fell against both the euro and the US dollar. It’s definitely worth watching closely if you're planning to buy property abroad or transfer large sums of money overseas."

Inflation figures 'won't be enough' to trigger a surprise rate cut

Matt Swannell, chief economic adviser at the EY Item Club, said the MPC "sent a clear message that back-to-back rate cuts were unlikely" unless subsequent economic data was weaker than expected.

He said the latest official data, which showed Consumer Prices Index (CPI) inflation remained at 2.2 percent in August, would not be enough to prompt the Bank to start cutting rates more quickly.

Sanjay Raja, chief UK economist for Deutsche Bank, agreed that the inflation figures "won't be enough to trigger a surprise rate cut" on Thursday.

"Instead, the MPC will likely take this as a positive sign that underlying price pressures are easing, and could warrant a further dial down of restrictive policy in November, when it conducts its next forecast update.

"The MPC will also have more information on the fiscal outlook, with the autumn Budget slated for October 30."

Multiple central banks slash interest rates this month

The European Central Bank (ECB) decided to cut interest rates in the Eurozone last week, the second reduction in a row.

The ECB's rate-setting council lowered the main deposit rate from 3.75 percent to 3.5 percent at the meeting.

Elsewhere, the Federal Reserve cut interest rates in the US by 50 basis points on Wednesday, the first cut in four years.

The reduction leaves the federal fund's rate at a range of 4.75 percent and five percent.

US Federal Reserve

Multiple central banks slash interest rates this month (Image: GETTY)

Bank of England widely 'expected to play it safe' with interest rates today

Analysts Widely expect the Base Rate to be held at five percent this afternoon.

Ahead of the announcement at 12pm, economics expert, professor Andrew Angus at Cranfield School of Management commented: "With economic growth and inflation having hit a plateau, I’m expecting the Bank of England to play it safe and hold interest rates this Thursday.

“The economy had a good start to the year but businesses are now waiting for clarity on the Government’s plans in next month’s all-important budget. This has cooled the economy and, combined with falling wage growth and unemployment levels, signals that a hold will be seen as the prudent choice for now. But, come November, the heat will be back on to cut rates.”

Bank of England

Bank of England widely 'expected to play it safe' with interest rates today (Image: GETTY)

Above-target inflation should not delay the next rate cut, says think tank

Commenting on the new data showing inflation remained at 2.2 percent in August, Julian Jessop, an economics fellow at the free market think tank, the Institute of Economic Affairs, said: "The latest UK inflation data were probably not good enough to tip the balance towards an interest rate cut this week, but the case for another move remains strong.

"The headline rate held at 2.2 percent in August, sticking above the MPC’s two percent target. The core rate (excluding food and energy) rose from 3.3 percent to 3.6 percent, led by a renewed surge in services inflation from 5.2 percent to 5.6 percent.”

However, Mr Jessop noted: “Most of the pick up reflected a jump in air fares, which are volatile from year to year depending on the timing of school holidays. Services inflation is also still lower than anticipated in the Bank’s latest Monetary Policy Report. There is little sign of the ‘wage-price’ spiral that some on the MPC fear.

"Headline inflation may spike in the autumn due to the increase in domestic energy bills, but the Bank has already signalled that it will look past this temporary effect.

"The bigger picture is that the economy is slowing again, the labour market is cooling, and interest rates are higher than necessary to continue bearing down on inflation."

What is the bank rate?

Bank Rate is the single most important interest rate in the UK and is often referred to as 'The Bank of England base rate' or even just 'base rate'.

This is set by the Monetary Policy Committee and it determines the interest rate commercial banks pay to hold money with the Bank of England.

In turn, this influences the rates those banks charge people to borrow money or pay on their savings.

What are interest rates?

Interest is what you pay for borrowing money, and what banks pay you for saving money with them.

Interest rates are shown as a percentage of the amount you borrow or save over a year. So if you put £100 into a savings account with a 1% interest rate, you’d have £101 a year later.

Good morning!

We will be tracking the meeting of the Bank of Englands Monetary Policy Committee today, with economists suggesting that they will decide to maintain interest rates at 5%

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