In a widely anticipated move, the Bank of England's MPC has just voted to reduce the base rate to 4.50%.
The Bank meets every six weeks to decide what should happen to interest rates, with the aim of keeping inflation to its target and keeping the wider economy healthy. It was announced that inflation was at 2.5% in the year to December, which is still above the 2% target the government sets for the Bank.
The 0.25% reduction in the Base Rate and the prospect of further cuts have been welcomed by estate agents and will provide a major boost for both the property industry and the wider economy, it will be given an even warmer welcome by Labour as it struggles to fulfil its growth pledge.
The move comes after December’s inflation figures were lower than expected, dropping from 2.6% the previous month to 2.5%. Swap rates, which affect the cost of fixed-rate mortgages, have been falling in anticipation of the move. Five-year swaps are down from 4.12% to 3.92%, and two-year swaps from 4.26% to 4.06%.
What’s happened to mortgage rates recently?
There has been marginal increases in mortgage rates in recent weeks, despite some lenders cutting rates across mortgage products. However, in the past week, the average rate for a 2-year fixed rate mortgage has fallen by 0.02% to 5% compared to a week ago, while the average rate 5-year fixed rate is now 4.79%.
Some big mortgage lenders, including Barclays and Coventry Building Society, have already reduced their mortgage rates. Others are now likely to follow suit, which will give buyer confidence a significant lift.
What does the base rate cut mean for mortgage rates?
Borrowers with mortgages that track the base rate are set to see an almost immediate impact on their mortgage rates. Meanwhile borrowers on fixed-rate deals that expire soon are likely to see the lower base rate factored into new deals.
The bank’s base rate has been at 4.75% since November last year, although mortgage rates have been softening for several months now in anticipation of further rate cuts and this, much to many estate agents’ relief, has helped boost demand.
The markets expect there to be three more base rate cuts this year, which means it should be down to 3.75% by the close of 2025.
Notably two members of the Monetary Policy Committee wanted a deeper cut to 4.25%, while Bank of England Governor Andrew Bailey signalled that there will be more reductions in the coming months.
Frances Haque, chief economist at Santander UK, said "the bank is forecasting three more cuts this year, including one in May. The cut to the Bank of England base rate will come as some light relief to those homeowners with fixed rate mortgages maturing this year, and should see a boost to overall household confidence, following a period of decline at the end of 2024.”
Haque reminded people that, while rates are lower than they were two years ago, borrowers coming off five-year fixed rate terms are still going to have to shoulder far higher mortgage rates.
Susannah Streeter, head of money and markets, Hargreaves Lansdown, said “the vote was resoundingly for a cut, with two members wanting to go even further pushing for a 0.5% reduction. This has increased expectations that further rate cuts will come more quickly this year with markets now pricing in the likelihood that the base rate will be close to 3.75% by December, indicating three further reductions. That’s been reflected in the movement of the sterling, which has continued to fall back against the dollar.”
The Bank of England halved its growth forecast for 2025, from 0.75% to 1.5%, meaning more cuts might be required to kickstart economic activity.
Streeter added “given the deteriorating economic picture, financial markets are now expecting at least two maybe three further interest rate cuts this year, with the base rate likely to drop below 4% by 2025. The speed will depend on how the economy responds in the months to come. Businesses are already feeling the pain of upcoming changes to National Insurance contributions, as with suppliers starting to pass on the costs of higher expected wage bills. “
Mark Harris, chief executive of mortgage broker SPF Private Clients, said “swap rates continue on a downwards path with some lenders dropping their mortgage rates, in part reversing recent increases. This rate reduction was largely expected by the markets and has therefore been factored into pricing already. However, a continual decline in Swaps would enable lenders to price more keenly, easing borrowers’ affordability concerns.
Those looking to take out a new mortgage or refinance in coming months should plan ahead as much as possible, seeking advice from a whole-of-market broker.”