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Frustration for borrowers as Bank of England holds firm on 5.25% base rate

  • 20/06/2024
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Frustration for borrowers as Bank of England holds firm on 5.25% base rate
The Bank of England (BoE) has maintained the base rate at 5.25%, adding to the disappointment faced by mortgage holders and credit borrowers, while savers may be able to eke out inflation-busting cash accounts for a while longer.

The Monetary Policy Committee (MPC) voted by a majority of 7-2 to maintain the base rate at 5.25%. Two members, Swati Dhingra and Dave Ramsden, preferred to cut the base rate by 0.25 percentage points to 5%, They explained that bank rate “needed to become less restrictive now to enable a smooth and gradual transition in the policy stance, and to account for lags in transmission”.

This is now the seventh consecutive time that the base rate has been frozen at 5.25% – last at this rate in March 2008, after earlier expectations suggested a rate cut could be on the cards as early as June.


Market uncertainty

Naturally, the bank has been monitoring wage growthinflation and GDP figures since the MPC’s last meeting.

While the Consumer Prices Index (CPI) measure of inflation has finally hit the 2% target, the committee said it is expected to rise slightly in the second half of this year, as declines in energy prices last year fall out of the annual comparison.

However, UK GDP appears to have grown more strongly than expected during the first half of this year, and is expected to grow 0.5% in Q4 2024 as a whole, stronger than the 0.2% rate that had been incorporated in the May report.

But the labour and wage statistics are the sticking point for the bank. It said the “considerable uncertainty” around estimates derived from the Office for National Statistics (ONS) Labour Force Survey “means that it is very difficult to gauge the evolution of labour market activity”.

Minutes of the meeting read: “Based on a broad set of indicators, the MPC judges that the labour market continues to loosen but that it remains relatively tight by historical standards.”

Turning to wages, the committee’s updated forecast for Q2 2024 sees annual growth of just over 5%.

“Recent data suggested a risk that near-term pay growth could moderate by less than had been expected in the May report. The bank’s agents’ contacts had reported that recent pay settlements for 2024 were slightly above the average level recorded in the agents’ annual pay survey presented in the February report,” it noted.

The minutes read: “Monetary policy will need to remain restrictive for sufficiently long to return inflation to the 2% target sustainably in the medium term in line with the MPC’s remit. The committee has judged since last autumn that monetary policy needs to be restrictive for an extended period of time until the risk of inflation becoming embedded above the 2% target dissipates.”

It added that the timing of the general election on 4 July “was not relevant to its decision at this meeting, which would as usual be made on the basis of what was judged necessary to achieve the 2% inflation target sustainably in the medium term”.

Overall, the bank rate is set to decline from 5.25% to 3.75% by the end of the forecast period, compared with an endpoint of 3.25% quoted in February.


‘Decision difficult to accept’

Nicholas Mendes, mortgage technical manager at John Charcol, said: “While today’s decision to hold rates steady may be difficult to accept, recent lender movements suggest we are approaching the end of the era of higher-priced fixed rates. Borrowers, though, will need to remain patient a bit longer before we start to see high street lenders battling amongst themselves at sub-4% fixes.”

Victor Trokoudes, founder and CEO at smart money app Plum, said there are still good savings deals to be had.

He said: “Thanks to high interest rates, it has become a lot easier to mitigate the effect of inflation on savings, with many easy-access saving accounts and cash ISAs delivering returns well in excess of 2%. It’s important to shop around and make sure you are getting the best deal possible to make the most of your savings while rates are high.”

Shaun Port, managing director of savings at Chase UK, said: “It’s no surprise that the Bank of England has decided to hold rates again, with services inflation recently remaining higher than desired and a general election just around the corner. For savers, it’s positive news as they can take advantage of rates and earn a good return on their money – however, it is likely we’ll see the bank reduce the base rate in the medium term.

“So, now is the time to assess your finances to make sure you’re managing your money in a way suited to your circumstances. Whether you value flexibility, easy access to your funds, or maximum returns on savings, it’s important to check that your savings account still works for you.”

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