Impact of Interest Rate Cuts on UK Mortgages and Savings

According to reports from The Guardian, the Bank of England’s decision comes as inflation rates have dropped significantly from their peak in 2022. The Consumer Price Index (CPI) rose by only 1.7% in the 12 months leading to September 2024. This marks a considerable slowdown in price increases, allowing the central bank to lower rates.

• Bank of England Cuts Rates Amid Lower Inflation: With inflation down to 1.7%, the Bank of England has reduced rates, which will benefit adjustable-rate mortgage holders in the UK while having a delayed effect on fixed-rate mortgages.
• Impact on Loans and Savings: Credit card and personal loan rates may decrease slowly, while savings account rates are expected to drop faster, impacting savers dependent on interest income.
• Global Trend of Rate Cuts: The UK’s decision mirrors similar rate reductions by the European Central Bank and the U.S. Federal Reserve, reflecting a global shift toward monetary easing.
• Fiscal and Political Influences: The UK’s recent budget announcement and Trump’s U.S. election victory add layers of uncertainty to the economic outlook, affecting global market reactions.

Mortgage holders in the UK will feel the impact of this rate cut. Around 600,000 homeowners with mortgages linked to the Bank’s rate will see immediate reductions in their monthly payments. However, the majority of mortgage customers have fixed-rate deals, so the effect will be postponed until they secure new deals. Currently, the average two-year fixed mortgage rate stands at 5.42%, and a five-year deal is 5.13%.

Interest rate changes also influence credit card and personal loan rates. While lenders might eventually lower their rates, the process tends to be gradual. Savings rates, however, are likely to decrease faster. The current average rate for an easy-access savings account is approximately 3% per year. This reduction could negatively impact those relying on interest income from savings.

The Bank of England’s decision aligns with similar moves by other central banks worldwide. The European Central Bank recently cut its main interest rate from 4% to 3.75% and then to 3.5%. Meanwhile, the US Federal Reserve also reduced rates, signaling a global trend of monetary easing.

The UK government’s October Budget has complicated the outlook for interest rates. Chancellor Rachel Reeves announced plans for increased borrowing and spending, influencing financial markets’ expectations. Additionally, Donald Trump’s recent US presidential victory may impact global economic conditions, adding further uncertainty.