The Bank of England has recently moved down its base rate of interest to 5%.
Reduction in Interest Rate
The Bank of England has cut its base rate of interest from 5.25% to 5%, acting as a slight easing in its restrictiveness. This is their first decrease in four years, and the decision was a narrow split between the central bank’s policy makers.
This reduction means households on tracker mortgages will see an immediate reduction in their monthly mortgage payments, and those on variable rate deals may also benefit.
Will it Decrease Further?
This 0.25% reduction has been able to take place due to some easing of inflationary pressures, with inflation being on their 2% target for two consecutive months.
However, their decision was very close-cut, with a 5-4 majority, and it’s unlikely this will decrease by much further.
The Bank of England have warned people not to see this recent decrease in the interest rate as a sign that we will have a sharp fall in the coming months.
Given that the UK economy has been stronger in recent months, this adds to the risk of inflation being worsened if the interest rate was to drop too sharply.
“inflation could be higher than we expected if we cut interest rates too much or too quickly. And despite easing, services price inflation and domestic inflationary pressures do remain elevated, so we need to make sure that inflation stays low. We need to put the period of high inflation firmly behind us and we need to be careful not to cut rates too much or too quickly, all the while monitoring the evidence on how inflationary pressures are evolving” – Andrew Bailey, Governor of the Bank of England
Andrew Bailey also noted that when we have previously had interest rates at near-zero, this was a side-effect of a number of “huge global shocks,” such as the 2007-2008 financial crisis. He said that he would not in normal circumstances expect interest rates to be near zero.
Therefore, we cannot expect for us to return to these low interest rates, as they were born out of exceptional circumstances. We also cannot expect interest rates to drop as quickly as they have risen in recent years, going down one meeting after another. Instead, a decrease will be something that happens gradually over a longer period of time.
It is likely that we will reach a ‘new normal’ for interest rates rather than returning to the ‘normal’ of the rates we saw pre-2021 before the Bank of England started raising rates so sharply. Some believe that the new neutral interest rate will rest around 3%, some believe 4%.