In this analysis, Laura Suter, director of personal finance at AJ Bell, reminds us not to get too excited as we consider what this Bank of England’s latest decision on interest rates to cut by 0.25% – the first cut for four years – means for clients’ finances.
Laura has been pretty quick off the mark, crunching some of the numbers on how it might translate for people’s finances as she outlines below:
“Today’s decision was finely balanced, with around 60% expectation that rates would be cut ahead of the meeting. And it looks as if that fine balance carried its way into the decision room, with five members of the MPC voting for a cut and four voting to keep rates at 5.25%. In the end it appears the fact inflation has been on target for two months, wage growth has ticked down, services inflation has dropped and there are questions about the path for future growth in the economy all meant that now was the time to cut.
“The public should remember the adage of rates rising like a rocket and falling like a feather. All too often mortgage companies are quick to pass on rate increases with rapid speed but far more sluggish to pass on rate cuts. That said, we’ve already seen some movement in the mortgage market, with providers launching sub-4% rates, and others will follow suit as competition heats up again in the market.
“Someone with a £125,000 tracker mortgage over 25 years will see around a £17 drop in their monthly payments as a result of a 0.25% cut today, while someone with £400,000 of borrowing over 25 years will see around £56 chopped from their monthly repayments – amounting to around £670 a year off their mortgage bill.
“The rate cut today is more symbolic than material, as a 25 basis point cut is not going to have a dramatic impact on anyone’s finances. Mortgage rates will drop a bit, the 643,000 people on a tracker mortgage will see a slight reduction in their monthly payments and savers might see a small drop in their savings rates, but the bigger impact of the cut is that it fires the starting gun for the rate cutting cycle. People will be buoyed by the fact interest rate hikes are behind us and that after a year of rates being over 5% they have finally been cut.
“But we shouldn’t get too excited. There is no expectation that today signals the start of a series of rapid and chunky cuts to rates, instead the Bank is likely to make one more small cut this year and take a wait-and-see approach each time. The Bank itself has cautioned that there are a number of factors that could change the data and turn the die against future rate cuts.
“The other big factor looming is the new government’s first Budget at the end of October, which could have a significant impact on a number of the key data points that the Bank is guided by. Clearly the direction of travel is tax increases, as confirmed by chancellor Rachel Reeves this week, so there’s limited chance of big giveaways that would cause inflation to spike again. But the Bank will factor in the fallout of any policy decisions into its forecasting for the UK economy and the future direction of rates.”
