An interest rate tells how much it costs to borrow funds, or the reward for saving it. The Bank of England or BoE’s base rate is what it charges other lenders to borrow funds. This impacts what they charge their customers for discerning loans, like mortgages. It also impacts the interest rate paid on savings accounts. As per Kavan Choksi UK, the BoE tends to move rates up and down in order to control UK inflation, which implies to the increase in the price of something over time.
Kavan Choksi UK underlines the impact of BoE interest rate cut on mortgages and loans
When inflation is high, the BoE might opt to raise rates in order to keep it at or near the target of 2%. The idea behind this is to encourage people to spend less money. This would reduce demand in the market, and thereby help bring inflation. Once this does happen, the central bank may hold rates, or cut them. The BoE rate came down recently to 4.75% from 5.25%. The Bank of England considers multiple measures of inflation when deciding how to change rates. This even includes price rises in parts of the economy like the services sector, which encompasses everything, right from restaurants to hairdressers.
Around 600,000 homeowners across the United Kingdom have a mortgage that “tracks” the Bank of England’s rate. Therefore, a base rate cut can lead to lower monthly repayments for them. However, many mortgage customers also have fixed rate deals. Even though the monthly payments of such individuals are not impacted immediately, their future deals are. A base rate cut is likely to not have much of an impact on the pricing of fixed-rate mortgages over the short term.
As per Kavan Choksi UK, Bank of England interest rates also have an impact on the amount charged by car loans, bank loans and credit cards. Lenders may choose to lower their interest rates if the decisions of the BoE make borrowing costs more affordable. This, however, takes time to happen.
The Bank of England interest rate also affects how much savers earn on their money. A declining base rate is likely to witness a reduction in the returns provided by both building societies and banks. The current average rate for an easy access account is around 3% a year. Any cut can especially impact the ones who take the interest from savings to top up their income.
In recent years, the United Kingdom has had one of the highest interest rates in the G7. This is the group that represents the seven largest so-called “advanced” economies of the world. In June of 2024, the ECB or European Central Bank cut its main interest rate from an all-time high of 4% to 3.75%. This was its first drop in five years. It cut rates again to 3.5% in September. United States interest rates also fell in September 2024, as the Federal Reserve cut its key lending rate fell by 0.5 percentage points to between 4.75% and 5%.
