As widely predicted, and not this time following the US Federal Reserve, the Bank of England’s Monetary Policy Committee (MPC) voted 5-4 to reduce the Bank Base Rate by 0.25% to a total rate of 4.25% its lowest level in around 2 years.
The decision is likely to improve mortgage affordability, paving the way for more people to move house this year.
The Bank's Monetary Policy Committee (MPC) were split 5-2-2 on the decision, two MPC members wanted to reduce the rate by 0.5% points, and two members preferred to maintain at 4.5%. The majority falling on a 0.25% reduction, showing the overwhelming pressure for a cut in rates. This is because, despite The Consumer Prices Index (CPI) inflation still being above target at 2.6% there are serious concerns over the stalling of GDP growth and the labour market loosening.
In its Monetary Policy Report, the Bank said that inflation is “following a bumpy path”.
It explained “inflation will increase temporarily this year before falling back to the 2% target. This is partly because of increases in energy prices, and increases in some regulated prices such as water bills.Inflation could stay higher than expected if the prices of some services continue to rise quite quickly. On the other hand, demand in the economy could be weaker than expected, which would lower prices.
What’s happened to mortgage rates recently?
Mortgage rates have continued to come down slowly in recent weeks. The average rate for a 2-year fixed rate mortgage has fallen by 0.05% to 4.64% compared to a week ago, while the average rate 5-year fixed rate is now 4.60%.
How does this impact interest rate predictions for 2025?
The report took a positive yet cautious approach to future base rate changes, stating "If things evolve as expected, we expect to reduce interest rates further. We will judge carefully how far and how fast to cut interest rates. The best contribution we can make to support economic growth and people’s prosperity is to make sure we have low and stable inflation."
What does the base rate cut mean for mortgage rates?
If you’re planning to get a new mortgage soon, you’re likely to see the lower base rate factored into new deals. This could make moving more affordable for you.
Whether you’re moving, buying your first home or your fixed rate is ending, it’s worth seeing if any lower rates are now available to you.
What could the Base Rate reduction mean for affordability?
Lenders’ ‘stress test’ calculations – which is how they calculate whether someone could afford a mortgage were their repayments to jump considerably – are directly linked to the Standard Variable Rates that we just talked about above.
The ‘stressed rate’ is usually the lender’s SVR, with at least 1% added on top. So, if lenders’ SVRs reduce in line with this Base Rate cut, we might start to see affordability improve, because the stressed amount will now be lower than if Base Rate wasn’t reduced today.
Further Cuts Predicted
US banking giant Morgan Stanley forecasts a series of cuts to the base interest rate by the Bank of England, with an eventual level of 2% possible.
The Bank of England will cut interest rates several times this year down to 3.25%, a major US bank has predicted. Morgan Stanley also says the UK interest rate will go as low as 2.75% in the first half of next year, and then ultimately down to 2%.
In March, the Bank of England held its base rate at 4.5%, a month after cutting it by 0.25%.
But US President Donald Trump’s tariff war will hit UK growth forcing the Bank of England to reduce the base interest rate, Morgan Stanley forecasts.
Starting with a cut from 4.5% to 4.25% last week, the Bank will introduce a series of reductions up to November, the American banking giant says.
Bruna Skarica, Chief UK Economist at Morgan Stanley, expects the terms “gradual and careful” to be removed from the Bank of England’s guidance on interest rates, the Daily Telegraph reports. She said "the Bank may make 0.5% cuts in June or August."
Inflation figures showing a surprise fall in March to 2.8% boosted hopes of further cuts in interest rates.
A majority of 8–1 of the Bank’s Monetary Policy Committee (MPC), including Governor Andrew Bailey, voted to maintain the rate.
However, if inflation continues to fall, there will be more encouragement for the Bank to reduce the base rate further.
The Bank has set an inflation target of 2% as part of its strategy to steer the economy in the right direction, and much will depend on April’s inflation rate which will be announced on 21 May.