Interest rates could take longer to fall further, says Bank
(about 13 hours later)
Interest rates are widely expected to be cut by the Bank of England on Thursday, in a move closely watched by businesses and consumers.
UK interest rates could take longer to fall after the Bank of England forecast that inflation will creep higher after last week's Budget.
Most analysts predict that the benchmark rate will fall from its current level of 5% to 4.75% when the decision is announced at 12:00 GMT.
It said while the extra spending will initially boost economic growth and cut unemployment, measures such as raising the cap on bus fares and VAT on private school fees will push prices up at a faster rate.
That would make borrowing money cheaper, but is likely to reduce the returns available to savers.
The Bank cut interest rates to 4.7% from 5% in a move than had been widely expected.
The Bank's Monetary Policy Committee (MPC) meets eight times a year to set rates.
Bank governor Andrew Bailey said rates were likely to "continue to fall gradually from here”, but cautioned they could not be cut "too quickly or by too much”.
Later in the day, the US central bank - the Federal Reserve - will also publish its latest interest rate decision.
It will come just a day after Donald Trump won the presidential race.
Investors now do not expect any further rate cuts this year with the Bank likely to hold rates at its meeting in December.
Bank of England expectation
Inflation – which measures the pace of price rises – fell below the Bank’s 2% target in the year to September, but was always expected to rise again after gas and electricity prices rose last month.
The Bank of England cut interest rates from 5.25% to 5% in August, which was the first drop in more than four years following a string of increases.
It was then forecast to drop back to 2% by 2026, but the Bank now expects that to happen in the following year.
Since then, official figures have revealed that the UK inflation rate - which charts the rising cost of living - dropped unexpectedly to 1.7% in September.
The Bank's rate setting body - the Monetary Policy Committee - voted 8-1 in favour of the cut.
That was the lowest rate for three-and-a-half years and below the 2% target set by the government. Interest rates are the main tool for the Bank to control the level of inflation.
Catherine Mann voted to keep rates on hold citing the impact of the Budget on inflation as one of the reasons.
Subsequent figures from the Office for National Statistics (ONS) showed that wage growth slowed to its lowest pace for more than two years.
The Bank's interest rate heavily influences the rates High Street banks and other money lenders charge customers for loans, as well as credit cards.
That gave more impetus to the likelihood of a Bank rate cut.
More than one million mortgage borrowers on tracker and variable deals are likely to see an immediate fall in their monthly repayments.
Bank Governor Andrew Bailey also told the Guardian, external last month that it could be a “bit more aggressive” at cutting borrowing costs, depending on the rate of inflation.
However, mortgage rates are still much higher than they have been for much of the past decade.
How it affects borrowers and savers
The average two-year fixed mortgage rate is 5.4%, according to financial information company Moneyfacts. A five-year deal has an average rate of 5.11%.
The Bank's base interest rate heavily influences the rates High Street banks and other money lenders charge customers for loans, as well as credit cards.
The latest rate cut means savers are likely see a reduction in the returns offered by banks and building societies. The current average rate for an easy access account is about 3% a year.
Lenders have mostly "priced in" the impact of a base rate cut when making decisions on their own interest rates.
Chancellor Rachel Reeves, said: “Today’s interest rate cut will be welcome news for millions of families, but I am under no illusion about the scale of the challenge facing households after the previous government’s mini-budget."
Mortgage rates are still much higher than they have been for much of the past decade. The average two-year fixed mortgage rate is 5.4%, according to financial information company Moneyfacts. A five-year deal has an average rate of 5.11%.
'Rate cuts hit our savings'
However, more than one million borrowers on tracker and variable deals could see an immediate fall in their monthly repayments if the Bank cuts rates.
Claire Hopwood and Gavin Laking have been consistently using their savings accounts while they get ready to buy their new house.
Savers would likely see a reduction in the returns offered by banks and building societies. The current average rate for an easy access account is about 3% a year.
Gavin says it’s frustrating how quickly interest rate cuts can hit their savings.
Rachel Springall, of Moneyfacts, said: "Savers are the ones who feel the force of cuts to interest rates. Those savers who use their interest to supplement their income will feel overlooked if rates plummet."
“We’ve been enjoying a 4.5% rate on one of our accounts but that’s now dropped to 3.9%."
Budget and US election impact
Claire says the higher interest rates have been helpful: “It’s cover for emergencies. That’s all you can do, really.”
Political events will feed into the Bank's decision on Thursday, specifically last week's Budget delivered by Chancellor Rachel Reeves, and Donald Trump's sweep to victory.
The timing and extent of rate cuts could be affected by the extra growth and inflation from last week’s Budget.
The government's official, but independent, forecaster - the Office for Budget Responsibility - said, in the short term, measures announced in the Budget would push inflation and interest rates higher than they would otherwise have been.
Last week, the Labour government's Budget included plans to borrow an additional £28bn a year, as well as £40bn in tax-raising measures.
This has created more doubt about whether the Bank of England will cut interest rates again following its meeting in December.
The biggest measure is an increase in National Insurance Contributions paid by employers.
Meanwhile, analysts' forecasts suggest US inflation will be higher under the expectation that Trump will introduce higher tariffs on all imports next year.
The Bank said that this would have a small impact on inflation. Businesses are expected to pass on the cost of higher National Insurance costs to customers by raising prices.
This would give the Federal Reserve less scope to ease interest rates, and could affect decisions made around the world, they said.
It could also result in a slower pace of wage rises for employees.
What are my savings options?
The Bank also revised up its growth forecast for 2025 and suggested that the rate of unemployment could fall sharply to 4.1% from 4.7%.
As a saver, you can shop around for the best account for you
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Loyalty often doesn't pay, because old savings accounts have among the worst interest rates
How will you be affected by the Bank of England’s latest interest rates? Share your experiences.
Savings products are offered by a range of providers, not just the big banks
The best deal is not the same for everyone - it depends on your circumstances
Higher interest rates are offered if you lock your money away for longer, but that will not suit everyone's lifestyle
Charities say it is important to try to keep some savings, however tight your budget, to help cover any unexpected costs
There is a guide to different savings accounts, and what to think about on the government-backed, independent MoneyHelper website, external.
