The Bank of England held UK interest rates steady at 5% in September. The decision was widely expected, but still came as a blow to households and businesses hoping to see borrowing costs fall further this month.
The Monetary Policy Committee (MPC) was clear-cut in its vote, with members opting to hold rates by an 8-1 majority. The only committee member who voted to reduce the base rate to 4.75% was Swati Dhingra, who has repeatedly advocated for a more dovish stance from the UK central bank.
The decision came seven weeks after the Bank of England’s August meeting, when it cut the base rate for the first time since 2020, bringing it down from a 16-year high of 5.25%. Since then, inflation has crept up to 2.2% and is expected to rise further later this year as energy prices go up. Despite this, most experts expect to see at least one further base rate cut before the end of the year.
Subscribe to MoneyWeek
Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE
Sign up to Money Morning
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
“Price rises rarely subside in a straight line, so the reacceleration in CPI inflation to above the Bank of England’s 2% target in July and August hasn’t caused significant angst among policymakers,” says Rob Morgan, chief investment analyst at wealth management firm Charles Stanley. “Indeed, price rises are trending below the BoE’s own previous forecast,” he adds.
A survey by the news agency Reuters shows that over 75% of economists (49 out of 65) expect to see one more cut in 2024. Of those 49 economists, all but one said this would come in November. A smaller group (16 out of 65) expect two more cuts before the year is out.
Against this backdrop, we examine the key variables at play. How many Bank of England meetings are left this year, how far will interest rates fall, and what will it mean for savers, mortgage rates and house prices?
Will interest rates continue to fall this year?
Speaking after September’s interest rate decision, governor Andrew Bailey said the MPC “should be able to reduce rates gradually over time” as long as there aren’t any surprises in the data. However, he was clear that the MPC would follow a cautious path ahead. “It’s vital that inflation stays low, so we need to be careful not to cut too fast or by too much,” he said.
The MPC won’t meet in October, which means it only has two remaining meetings this year – one in November followed by another in December. The majority of experts have said another rate cut looks likely in November, but that could change if the economic data doesn’t play ball.
Wage growth, core inflation and services inflation are all important metrics to watch, and there is still progress to be made. Although wage growth has slowed to 5.1%, the slowest rate in over two years, the indicator is still higher than the Bank of England would like. Meanwhile, core and services inflation both crept up in August. Core inflation rose from 3.3% to 3.6%, while services inflation increased from 5.2% to 5.6%.
Responding to the latest MPC decision, experts at ING noted that the Bank of England sounded “much more cautious” in its language than the Fed, which delivered a massive 0.5% cut this month. Despite this, they do not expect the UK to deviate too far from the US in its rate-cutting cycle.
James Smith and Michiel Tukker, experts on the UK economy and European rates, said: “As the Bank readily concedes, the recent stickiness in service sector inflation is mostly down to volatile categories that hold little relevance for monetary policy decisions. Strip that out, and the picture is slowly looking better.
“Meanwhile, the jobs data, though admittedly of dubious quality right now, points to an ongoing cooldown too. The number of payrolled employees appears to be falling now and that will inevitably feed through to wage growth.”
Against this backdrop, Smith and Tukker expect the pace of UK rate cuts to accelerate after November. “We expect a cut in November and December, with further cuts in 2025 taking us to 3.25% by the end of next summer,” they said.
Will politics influence the MPC’s decision-making?
The summer recess is now well and truly over, and we are entering a busy period for the government. Chancellor Rachel Reeves is set to deliver her first Budget on 30 October, when she will announce a string of new policies on taxation and spending.
The prime minister has already warned that the Budget will be “painful”, fuelling speculation that several taxes will go up. The Bank of England will be watching closely to understand how the measures announced will impact the economic data. Labour has been clear that it intends to follow strict fiscal rules to help maintain economic stability.
One point of discussion has been the pay rises announced by Reeves in July, when she delivered her spending audit. As part of this, she committed to a pay rise for public sector workers, including a 5.5% rise for school teachers and a 22% rise for junior doctors.
Critics have suggested this could keep UK wage growth (and by extension inflation) higher for longer, however Bailey dispelled some of these fears when he spoke at the MPC’s August press conference.
Any impact on inflation would be incremental, Bailey suggested, only getting into “quite small second decimal place numbers”. He cautioned that this was based on “back of the envelope” calculations, but that the MPC would get a fuller picture by 30 October when the Budget is delivered.
Commenting on the upcoming Budget, Ruth Gregory, deputy chief UK economist at Capital Economics, said: “In terms of fiscal policy, the chancellor has already told us that public spending will rise by £16bn in the 2024/25 financial year. We also think that taxes will rise by £16bn a year to pay for it. Essentially, that leaves the stance of fiscal policy broadly unchanged from that left over by the previous government.”
How do interest rates control inflation?
Interest rates are the main tool the Bank of England uses to control inflation. In theory, when the MPC increases interest rates, it reduces the flow of money around the economy. Meanwhile, when it cuts rates, households have more money left over in their pocket to spend.
This works because higher interest rates make it more expensive for households to pay their mortgages and service any debts, which means they have less disposable income left over after paying for the essentials. When spending slows, prices rise more slowly too. Sometimes, they even start to plateau or fall if demand drops sufficiently.
It’s not just consumers that are impacted, though. Higher interest rates can also slow economic growth. They make it more expensive for businesses to borrow money, which ultimately hits their bottom line.
If interest rates are kept high for long enough, the risk is that the economy slips into recession, which invariably results in an increase in the unemployment rate as businesses are forced to make cutbacks.
When setting interest rates, policymakers have to walk the tightrope between controlling inflation and maintaining growth. So far, UK economic growth has proved fairly resilient, despite the latest figures showing zero growth in June and July. The UK dipped into a brief and shallow recession at the end of 2023, but quickly emerged.
What do falling interest rates mean for mortgages and house prices?
Mortgage rates are higher today than they have been for much of the past decade. This is partly down to a higher base rate, but Liz Truss’s mini-Budget in September 2022 also proved disruptive to the mortgage market. At their peak last summer, two-year rates threatened to top 7% and five-year deals came in at almost 6.4%.
While rates remain reasonably elevated, the good news is that they have fallen significantly from these highs. Mortgage costs were already coming down before the Bank of England’s first base rate cut on 1 August, and they have fallen further since thanks to competition between lenders.
The average two-year fixed-rate mortgage now costs 5.45%, while the average five-year rate is 5.12%, according to Moneyfacts. By shopping around, some borrowers will be able to secure sub-4% rates. Mortgage rates should continue to fall as further base rate cuts materialise.
The bad news is that around 1.6 million mortgage holders will see their deals expire this year, according to trade body UK Finance. Those who are coming to the end of a relatively cheap five-year fixed-rate deal will see their monthly repayments rise by a significant amount.
There could be good news for homeowners looking to sell, though. The housing market has been dampened by higher mortgage rates since prices peaked in the summer of 2022, but falling mortgage rates could bring more buyers to the market. House prices typically rise when interest rates are cut, as affordability constraints loosen and buyer demand picks up. This is something to keep an eye on if you are thinking about the best time to sell your house.
The process will take time, of course, and saving a deposit is still a stretch for many first-time buyers. However, the latest Rightmove data shows agreed sales are up 27% year-on-year as pent-up buyer demand is being released. It suggests households are slowly emerging from the cost-of-living crisis.
What do falling interest rates mean for savings?
Several providers have pulled their top savings deals over the past seven weeks, after the MPC announced its first rate cut on 1 August. Some of the most competitive accounts still pay rates of around 5%, but savers will need to act quickly to take advantage of the current offering. They should not get complacent just because the MPC decided to hold rates on 19 September.
Most easy-access accounts pay a variable rate, which will typically come down as the Bank of England makes further base rate cuts. With this in mind, it could be worth considering a fixed-rate account if you are able to lock part of your savings pot away for a set period of time. Again, savers will need to act quickly to secure the best fixed-rate deals, as these are also on a downward trend.
Rachel Springall, finance expert at Moneyfacts, says: “Savings rates fell across both variable and fixed sectors in August, which is the first time all rates dropped since the start of 2024. The downward path was perhaps an inevitable direction after the Bank of England base rate was cut, but it can take a few weeks for providers to make a move in response.
“One area of the savings market to take a hit has been easy-access accounts, seeing the biggest month-on-month drop since April 2024. Those savers who have not reviewed their savings accounts would be wise to do so, to ensure they are still paying a competitive return.”
See our round-up of the best easy-access rates, one-year savings accounts, regular saver accounts and cash ISAs for the latest deals on cash savings.
-
5 steps to shield your money from the taxman before the BudgetExperts have warned Labour is planning a tax raid in its upcoming Budget. We share five steps to shield your money from the taxman
-
The trading apps that let you put fractional shares in an ISAAdvice HMRC is set to change ISA rules to allow fractional shares to be included in the tax wrapper. Here are the trading platforms and trading apps that support this.
-
Interest rates held at 5.25% again – is a cut coming?News The Bank of England’s Monetary Policy Committee has held interest rates at 5.25% for the third consecutive meeting – what does it mean for your money?
-
Key money dates for 2024As we approach the end of the year, there are still plenty of important dates to be aware of that could affect your financial health. We run through the key dates in 2024 for managing your money
-
UK wages grow at a record paceThe latest UK wages data will add pressure on the BoE to push interest rates even higher.
-
UK economy avoids stagnation with surprise growthGross domestic product increased by 0.2% in the second quarter and by 0.5% in June
-
UK inflation remains at 8.7% ‒ what it means for your moneyInflation was unmoved at 8.7% in the 12 months to May. What does this ‘sticky’ rate of inflation mean for your money?
-
ONS: UK economy shrank 0.3% in MarchNews The latest data from the ONS showed falling car and retail sales combined with industrial action caused GDP to contract in March. However, the economy expanded by 0.1% in the first quarter overall.
-
Bank of England hikes base rate to 4.5%News The Bank of England has hiked rates again as it continues its battle with inflation.
-
It’s been 16 years, but the UK economy finally has a chanceOpinion The UK economy has been dealing with one crisis after another since 2007. Policymakers now have a chance to fix some of the underlying problems holding back growth.
