Bank of England reduces base rate to 5%

As anticipated, the Bank of England reduced the base interest rate on August 1st from 5.25% to 5%. The decision was a close call, with a majority of five to four voting in favour of the cut.

The Monetary Policy Report that accompanies the decision explains that while higher interest rates have helped return inflation to the Bank’s target of 2% and allowed them to make this cut, they are expecting a temporary increase to 2.75% later this year.

Why might inflation increase again?

The fall in household energy prices has been helping to bring inflation down, however as energy prices normalise, that impact will end. Prices for services, such as hotels and restaurants, insurance and rents for housing on the other hand, continue to rise at rates well above their past averages.

In addition, demand for goods and services this year has been higher than expected and may contribute to higher inflation.

However, the Bank consider this to be a temporary situation and expects inflation to fall back to their target level next year.

Is another rate cut likely?

The Bank are prioritising keeping inflation low and have said that they won’t cut rates too much or too quickly, suggesting a further cut when they next meet on 19th September is unlikely.

What impact will the rate cut have?

Regardless of future decisions, the cut to 5% is good news for borrowers, but may not be so good for savers.

Commercial banks typically tend to follow the Bank of England, but not necessarily all to the same degree. If you have loan finance on variable interest rates, check to see that the interest rate reduces. Many loans and overdrafts have a rate that is tied to the Bank of England’s base rate so these should reduce automatically.

If you have savings, it may be worth checking you’re getting the best rates on the market.