The base rate was reduced by 0.25% on a 4:5 vote, with four members of the MPC wanting to maintain it at 4.25% against the backdrop of high inflation – which was 3.6% in June.
An expected decision
Charles Resnick, chief finance officer at Afin Bank, said the markets had been pricing in a rate cut since June’s MPC meeting, so the drop to 4% was “no surprise”.
However, he said the vote showed just how close the decision was and potentially hinted at the “future direction of base rate travel”.
Resnick said: “At 3.6%, inflation is still way above the Bank of England’s 2% target, while signs of economic growth are thin on the ground. The country, and the markets, are holding their breath to see what Chancellor Rachel Reeves announces in her Autumn Budget later in the year and whether this would likely lead to further base rate cuts towards the end of the year and into 2026.”
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David Hollingworth, associate director at L&C Mortgages, said it would have been a shock if there was no base rate reduction, adding that the split vote “underlines that there remains a good degree of uncertainty for borrowers”.
Luther Yeates, head of mortgages at Orton Financial, said while it was encouraging to see the Bank of England act to stimulate growth, rising taxes on individuals and businesses continue to drag on the economy.
Yeates continued: “It is great to see the bank making moves to stimulate the economy and support growth. But there are still significant downward pressures due to increases in taxation on individuals and businesses. We are unlikely to see any meaningful benefit from the reduction in base rate, and it will instead slow the decline and move towards recession.”
Jo Carrasco, business partnerships director at Stonebridge, said this showed the MPC felt there was more risk in a “faltering economy rather than entrenched inflation”.
She added: “While inflation remains nearly double the Bank of England’s target, the balance has shifted. Wage growth is easing, the labour market is softening, and GDP data shows the economy retracted in May. Meanwhile, the bank appears increasingly confident that inflation will roll back next year, creating room to begin loosening policy.”
Mark Harris, chief executive of SPF Private Clients, said the decision pointed to a “slow and steady pattern in reductions” to ensure inflation was under control before taking more “drastic action”.
Harris added: “Swap rates continue on a downwards path, with lenders reducing mortgage rates in recent weeks and a plethora of sub-4% deals now available. This latest rate reduction was largely expected and has been factored into pricing already.
“However, it’s not just pricing that is improving as lenders are also broadening policy, including increasing loan-to-income caps and lowering some income requirements, which is boosting affordability.”
Lenders have already priced the base rate in
Hollingworth said the decision took the base rate back to the level it was in 2023, when interest rates were rising.
He added: “It’s worth noting that today’s decision will have been factored in already, so borrowers expecting big drops to fixed deals could be disappointed.”
Sarah Coles, head of personal finance at Hargreaves Lansdown, said the mortgage market had seen “more tweaks up and down than a yo-yo testing team” in recent weeks.
She added: “Rates have been trending down, but anyone hoping for super speedy cuts in the coming months should bear in mind how divided the committee is. It means we’re unlikely to see rapid-fire cuts from the Bank of England, so mortgages might not get much cheaper in a hurry.”
Peter Stimson, director of mortgages at MPowered, said: “Borrowers are unlikely to see any material changes to their mortgage rates in the immediate term, simply as it is already priced into the swap curves. The only thing that is really going to drive any material change is a significant fall in CPI, allowing the hawks at the bank to agree that the beast of inflation has finally been tamed.”
However, Nick Jones, mortgage sales and marketing director at Access FS, predicted this could be the start of much lower mortgage rates, saying: “Personally, I think it is now much more likely that best buy rates could come close to 3% next year. The lowest rates available at the moment – for people with big 40% deposits or lots of equity in their homes – are just over 3.7%.
“Given the base rate was 5.25% in August 2023, that’s already looking pretty positive. But if the MPC continues to lower the base rate – especially if inflation weakens and the labour market softens further – mortgage rates could continue to drop into 2026.”
Lower base rate might encourage buyers
Resnick said the lower base rate would bring relief to those on variable rates and “may even spur on more first-time buyers, which would help stimulate the mortgage market”.
Ben Thompson, deputy CEO of Mortgage Advice Bureau (MAB), added that this reduction “will provide even more incentive for aspiring homeowners to step onto the property ladder”.
“It was already a good time to buy, but this latest move makes it even more attractive,” Thompson said.
Tony Hall, head of business development at Saffron for Intermediaries, said the timing was “significant”, especially as the government announced the “most substantial regulatory shake-up in a decade” in its Plan for Change.
“Together with the rate cut, these changes could bring more buyers into the market and inject fresh momentum as we head into autumn,” Hall added.
