Bank of England cuts the base rate

The Bank of England has opted for a modest 0.25% cut, taking the central policy rate to 5%, and marking a first reversal on two years of hikes thanks to soaring inflation. The last cut was in March 2020.

The base rate is the interest rate the Bank of England charges other institutions such as banks and building societies to borrow money. For this reason, it has a knock-on impact on products such as mortgages and savings.

Derrick Dunne, CEO of YOU Asset Management, comments: “As expected, the Bank of England has begun to cut its base rate. With inflation back around target it feels comfortable enough to begin easing financial conditions. It is notable that the Bank has opted to act before the US Fed, which has put off cuts till September at the earliest.

“However, a 5-4 split on the MPC is a clear sign of continued hesitancy about cutting. The committee has stressed that any further cuts will come at a benign pace, as it looks to find a neutral rate for the economy.”

With mortgages, the market interest rates function through what are called ‘swap rates’ and are therefore not directly correlated with the base rate. Major lenders have already cut rates on the back of the base rate reduction, but it is possible the rest of the market will move more cautiously depending on the dynamics of the swap rate market.

Savings rates however are more directly affected by the base rate. In the wake of hikes that began in 2022, the level of interest paid on cash accounts rose significantly, from a typical easy-access rate below 1% in the decade before, to just below 2.8% according to price comparison site Finder.

It is highly likely that savings rates will now begin to fall in earnest, with some average rates already doing so, according to Finder’s data.

Where next for savings?

It is essential therefore that anyone with large savings pots held in cash accounts consider their options, particularly if the rate on their account is due to expire, or liable to be lowered by the provider.

Dunne adds: “A rate cut will be positive news for both households and businesses – not just because it makes borrowing cheaper – but because it means the Bank is sufficiently confident that the inflation genie is back in the bottle.

“However, it is now savers who need to carefully consider next steps. Cash rates have been attractive for some time now, but this is going to begin to fall away quickly. Anyone unsure about their next move should speak with a qualified financial planner.”

If you are in this position, take a look at our guide to savings rates now that the Bank of England has cut its base rate.

And if you would like to discuss the issue further, don’t hesitate to get in touch with our financial planners who can assist in making the best choice possible for your long-term plans.