What the Latest Interest Rate Decision Means for Homeowners and Borrowers

As widely expected, the Bank of England recently decided to hold its interest rates steady at 5%, with Governor Andrew Bailey pointing to signs of cooling inflation as a key factor behind the decision. The Bank’s approach suggests that we could see gradual rate cuts over the coming months. However, Bailey cautioned that ‘it’s vital inflation stays low’, underscoring the delicate balance the Bank must strike in reducing rates without risking an inflation resurgence.

The decision takes into account a broad range of inflation indicators, some of which remain higher than the Bank would prefer. Sectors like services, which include industries such as hospitality and personal care, have continued to experience notable price increases, adding complexity to the rate-setting process. The Bank must tread carefully, as cutting rates too quickly or too deeply could result in having to hike them again, should inflation rear its head once more.

When might we see interest rate cuts?

While the Bank of England opted not to lower rates this month, many market analysts are speculating that the first cut could come as soon as November. However, predicting the scale of potential cuts remains challenging. Although inflation briefly hit the Bank’s 2% target earlier this year, it is expected to hover slightly above this mark for the remainder of 2024 before easing further in 2025.

The International Monetary Fund (IMF) has weighed in, recommending that UK interest rates should fall to around 3.5% by the end of 2025. However, the IMF has also warned that inflation pressures could persist in economies like the UK and the US, possibly keeping rates elevated for longer than initially anticipated.

How does this affect mortgage holders?

For UK homeowners, the outlook for mortgage rates remains a hot topic. Currently, just under a third of households have a mortgage, with around 1.6 million deals set to expire in 2024, according to UK Finance.

Approximately 500,000 households have mortgages that are directly tied to the Bank of England’s base rate, meaning any changes in interest rates will immediately affect their repayments. However, the majority of mortgage holders—around 80%—are on fixed-rate deals. While this offers some short-term protection, the next time they come to remortgage, they could face significantly higher costs.

The current average two-year fixed-rate mortgage stands at 5.47%, according to Moneyfacts. While intense competition among lenders has led to some rate cuts in recent months, prospective buyers and those remortgaging will still find themselves paying much more than they would have done just a few years ago.

Global interest rate trends

Interest rate decisions are not just a UK issue; they’re part of a global economic trend. In recent years, the UK has consistently had one of the highest interest rates among the G7 nations. But central banks worldwide are also making moves to adjust rates in response to inflation pressures.

The European Central Bank (ECB), for instance, has already reduced its main interest rate twice this year, bringing it down from an all-time high of 4% to 3.5% as of September. Similarly, the US Federal Reserve cut its key rate by 0.5 percentage points to between 4.75% and 5% in September, its first rate cut in four years, with further reductions potentially on the horizon.

Considering next moves

For borrowers and mortgage holders in the UK, the next few months will be critical. While we may see gradual interest rate cuts, the pace and size of those reductions will depend on how inflation behaves in the coming months. At Henry Dannell, we continue to monitor the situation closely, providing expert guidance to ensure that homeowners and prospective buyers are well-prepared for any changes in the financial landscape.

If you’re considering a mortgage or remortgage soon, now is the time to review your options and seek professional advice to make the best financial decisions in an ever-shifting market.

Please note: a mortgage is secured against your home or property. Your home or property may be repossessed if you do not keep up repayments on your mortgage or any other debt secured on it.