Money blog: Major boost for mortgage holders as Bank of England finally cuts interest rate (2024)

Sky's data and economics editor Ed Conwayasks the Bank chief what he means when he says the rates are still in "restrictive territory" and when can we expect this to change.

"We look at restrictiveness in terms of where we think growth is," Andrew Bailey explains.

He says if you look the Bank's forecast for GDP, growth is "picking up".

"We're still below potential and we do have a small output gap opening up in the forecast," he says.

"I think that's one way of capturing the fact that there is still a restrictive setting in that sense and we think that is appropriate given we have to ensure the persistence of inflation is taken out of the system," he says.

He says "there is a way to go".

We now move to a Q&A.

The Bank of England governor Andrew Bailey is asked whether this cut will be "one and done", or whether we can expect a further decline down the road.

"I'm not giving you any view on the path of rates to come," he says.

"I'm saying we will go from meeting to meeting, as we always do."

He tweaks the question and asks himself (and then answers): "What's changed?"

"The answer is nothing's really changed actually much in terms of the economic news. It's that we have become more confident [as time has gone on]," he adds.

Bank of England governor Andrew Bailey says a consideration for the Bank is whether the decline in inflation is "baked in as the global shocks that drove up inflation unwind".

"Or are we experiencing a more permanent change to wage and price setting which will require monetary policy to remain tighter for longer," he says.

Mr Bailey says these have become "important questions" in the MPC policy considerations.

The Bank chief says "we should expect the perceptions of current inflation and expectations of future inflation will play into wage bargaining and price setting".

The Bank is forecasting inflation will increase to about 2.75% later this year.

It will then return to target 2% in 2025, the Bank thinks.

"We need to put the period of high inflation firmly behind us," Mr Bailey says. "We need to be careful not to cut rates too much or too quickly."

Bank of England governor Andrew Bailey is speaking on the Bank's decision to cut the interest rate from 5.25% to 5%.

He's joined by other members of the Bank's Monetary Policy Committee.

Watch live in the stream above.

The Bank of England has cautioned that interest rates will fall more gradually than they rose.

Shortly after cutting the rate, governor Andrew Bailey said policymakers "need to make sure inflation stays low, and be careful not to cut interest rates too quickly or by too much".

He added: "Ensuring low and stable inflation is the best thing we can do to support economic growth and the prosperity of the country."

The base interest rate rose quickly from 0.1% in late 2021 to a peak of 5.25% last summer, before remaining there for 12 months.

With many mortgage lenders having already priced in a cut for several months, a leading estate agent has suggested the biggest impact of today's cut might be on housing market sentiment.

Simon Gammon, managing partner of Knight Frank Finance, said:"Today's decision will have a limited impact on mortgage rates but it will be transformative for sentiment.

"There is a meaningful group of buyers that put off moving home in the wake of the mini-budget that can now push on with confidence. The Bank of England has been particularly cautious, so by opting to cut the base rate it has sent a real statement that inflation is largely beaten.

"The lenders have already cut margins to the bone, so this cut was pretty much priced into fixed rates.

"That said, we've seen that the larger lenders are happy to take a hit to profits to gain market share, so we may well see another round of marginal cuts in the days ahead."

We've had a reaction from Chancellor Rachel Reeves to the cut in the base rate.

In a statement, she says: "While today's cut in interest rates will be welcome news, millions of families are still facing higher mortgage rates after the mini-budget."

The disastrous mini-budget in September 2022 under Liz Truss's shortlived administration prompted the pound to plummet and inflation to soar, triggering mortgage mayhem.

Ms Reeves continued: "That is why this government is taking the difficult decisions now to fix the foundations of our economy after years of low growth, so we can rebuild Britain and make every part of our country better off."

On the other side of the political aisle, shadow chancellor Jeremy Hunt is trying to present the rates cut as the outcome of his party's prudent management of the economy.

He said: "Today's cut will be welcome news for millions of homeowners and shows that Labour inherited a stronger economy which was on the right track.

"In government, we took difficult decisions that cut inflation from 11.1% to the Bank's target 2% paving the way for lower rates.

"Our concern is that further substantive cuts may now take longer because of inflation-busting public sector pay rises rushed through by the chancellor ahead of the summer."

The Monetary Policy Committee (MPC) voted 5-4 in favour of cutting the interest rate to 5% flat, with governor Andrew Bailey the deciding factor.

The last MPC meeting saw members voting 7-2 in favour of holding the rate.

Our business presenter Ian King says the minutes from the meeting "note earnings growth fell to 5.6% in the three months to May and services inflation coming down".

"So the Bank satisfied there that inflationary pressures are starting to ease," he adds.

However, "I think what you can take from the minutes [and the voting split] might be that this will be the last interest rate cut for a while".

"The market is pricing in another rate cut between now and the end of the year, but it looks like this decision was pretty finely balanced."

It has been a long time coming.

After two years during which the Bank of England raised interest rates at nearly every meeting - and another year in which those rates sat at what is, for many households and businesses, a painfully high level - today they have finally been cut.

So this is a watershed moment - a critical turning point for the UK economy.

Interest rates are the Bank's main tool for trying to control inflation.

Higher rates deter people from borrowing and encourage them to save - hence less money gets spent out there in the economy and retailers become less confident about setting high prices.

High interest rates are, to put it more bluntly, a form of economic pain.

And the Bank thinks that even at 5%, where they are now after today's cut, they are still at a painful level - or, as they would put it, "in restrictive territory".

This is a large part of the explanation for why unemployment is higher, house prices are lower and for why many households are still struggling - even though the annual rate of inflation is now back to the Bank's target rate of 2%.

So the decision to cut rates will start, gradually, to reduce that pressure - that pain.

Indeed, in some senses the pain is already reducing somewhat: mortgage providers, anticipating lower Bank of England rates, have already begun to reduce fixed rate mortgage rates.

Today, those with floating rate mortgages will see an instant reduction in their costs.

The big question now is: what next? First things first, don't expect those borrowing costs to come down as quickly as they went up. Markets think there might be one more cut this year, and that borrowing costs will come down quite gradually.

Second, few people inside the Bank expect borrowing costs to come down to the levels they were at back in 2021, when they were sitting at a historic low of 0.1%.

Instead, they seem moderately happy with market expectations that rates will drop only to 3.5% over the next three years.

Are interest rates still in "restrictive territory" then? That's a question no-one at the Bank wants to answer.

The Bank's decision today wasn't exactly a surprise: financial markets had put the probability of a rate cut today at over 60%.

Even so, it was perhaps the most finely balanced decision in a long time.

Far from being a unanimous verdict, four of the nine members of the Monetary Policy Committee actually voted to leave interest rates at 5.25%. This wasn't, in other words, a slam dunk.

And the documents released alongside the decision were chock full of provisos: rates would need to "remain restrictive for sufficiently long until the risks to inflation retuning sustainably to the 2% target in the medium term had dissipated further".

In other words: we're not out of the woods yet. The Bank is still paranoid about inflation. Then again, it always was. And today it finally cut interest rates - and signalled there will be more to come in the coming months.

By Ed Conway, economics and data editor

The Bank of England has cut interest rates by a quarter percentage point to 5%.

The Bank's nine-member Monetary Policy Committee voted 5-4 to bring borrowing costs down, bringing to an end the joint-longest plateau for rates since the Bank was granted independence in 1997.

Lower interest rates will instantly be reflected in many savings accounts and floating rate mortgages, though those selling fixed rate mortgages had long ago reflected the likelihood of lower rates.

The Bank's decision came after the consumer price index rate of inflation dropped to 2% this summer - the MPC's target.

However, updated forecasts from the Bank's staff suggests inflation will bounce back in the coming months, rising to around 2.75% by the end of the year.

It is a watershed moment, since many economists expect the Bank to continue cutting borrowing costs in the coming months.

However, Governor Andrew Bailey warned that consumers should not expect the Bank to cut rates as rapidly as it had raised them (14 successive increases between late 2021 and mid-2023).

"Inflationary pressures have eased enough that we've been able to cut interest rates today," he said.

"But we need to make sure inflation stays low, and be careful not to cut interest rates too quickly or by too much. Ensuring low and stable inflation is the best thing we can do to support economic growth and the prosperity of the country."

The Bank sharply upgraded its forecast for economic growth this year, from 0.5% to 1.5%.

It expects the economy to expand by 0.7% in the second quarter, followed by 0.4% the quarter after that.

However, it said it had yet to incorporate the impact of any measures introduced by Rachel Reeves into its forecasts.

The nine MPC members were briefed on the new chancellor's latest fiscal announcement earlier this week - about a "black hole" in the public finances and various measures to fill it.

That announcement included a 5.5% pay increase for public sector workers.

Bank insiders say that deal is unlikely to stoke noticeable inflationary pressure, but it will do a full audit of the plans after the budget in October.