Interest rates have been cut to 5% today (1 August), in the first downward move from the Bank of England since the frantic days of the coronavirus pandemic.
The Monetary Policy Committee (MPC) was closely split, voting to cut rates by a majority of 5-4. Governor Andrew Bailey cast the deciding vote.
Deputy governor Clare Lombardelli, who was voting for the first time after joining the MPC in July, also voted in favour of the proposition.
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"It is now appropriate to reduce slightly the degree of policy restrictiveness," the MPC said in its report. "The impact from past external shocks has abated and there has been some progress in moderating risks of persistence in inflation."
This comes as good news to households and businesses struggling with the cost of mortgage and debt repayments.
As the reins start to loosen, it could also bode well for UK markets and economic growth, particularly if consumers start to feel they have more money in their pocket to spend.
Savers may be less pleased, though. Many of the best savings deals have already been pulled in recent months and savings rates are likely to fall further as the base rate is cut.
Experts had warned that today’s interest rate decision rested on a knife-edge after inflation returned to 2% in May and June, but services inflation and wage growth remained high.
However, markets had been warming up to the prospect of a cut over the course of this week. Late on Wednesday, they were pricing in more than a 60% chance of a first move from the Bank of England.
Economists were also bullish, with the latest Reuters poll showing that 80% expected August to be the month.
We look at what the Bank of England decision means for your money. Plus, will interest rates continue to fall?
Will interest rates continue to fall?
Households and businesses will breathe a sigh of relief, but it is too early to pop the champagne.
The MPC has warned that it expects the headline rate of inflation to rise to around 2.75% in the second half of this year, as "declines in energy prices last year fall out of the annual comparison, revealing more clearly the prevailing persistence of domestic inflationary pressures".
While the Bank of England has taken the first step towards normalising monetary policy, we should not expect rates to come down hard and fast.
In its summary report, the MPC said: "Monetary policy will need to continue to remain restrictive for sufficiently long until the risks to inflation returning sustainably to the 2% target in the medium term have dissipated further."
Onlookers will continue to watch the upcoming inflation, wage growth, and GDP reports with interest. Services inflation and wage growth are still coming in quite strong.
The services sector accounts for around 80% of the UK’s economic output, so it is an important area to watch.
Services inflation came in at 5.7% in May and held steady in June, with some commentators holding Taylor Swift responsible after her Eras Tour hit UK soil in June, causing hotel and restaurant costs to surge.
Wage growth also came in at 5.7% between March and May, and chancellor Rachel Reeves announced a series of public sector pay rises earlier this week (29 July). Teachers will see their pay go up by 5.5%, while junior doctors could see a 22% rise over the next two years.
That said, James Smith, developed market economist at ING, told MoneyWeek that this shouldn’t impact the MPC’s thinking. He said: “The Bank of England can’t ignore it, but does this change how far or fast interest rates are cut? I doubt it.
“The question is whether this sparks further pay growth in the private sector, but actually I think the causality is the other way around. Private-sector pay growth has been outpacing the public sector for some time and the latter is playing catch up.”
What does a rate cut mean for mortgages?
Falling interest rates are good news for mortgage holders, who have seen their monthly repayments skyrocket in recent years. Mortgage rates have already started to come down so far this year in anticipation of base rate cuts.
“Fixed mortgage rates have been falling at a steady pace, with lenders feeling more encouraged to re-price their deals due to positive swap rates,” explains Rachel Springall, finance expert at Moneyfacts.
As a result, average two and five-year fixed mortgage rates decreased month-on-month for the first time since February 2024, and now sit at 5.77% and 5.38% respectively, according to Moneyfacts.
First-time buyers and those looking to remortgage will still benefit from shopping around, though. Last month, sub-4% mortgages returned to the market for the first time since April 2024.
That said, rates still remain high compared to where they were in the late 2010s – and around 1.6 million homeowners are expected to see their fixed-rate deals come to an end this year, according to trade body UK Finance.
Those who are coming to the end of a five-year fixed-rate deal will see their monthly repayments rise by a significant amount. See our article on how to cope with higher mortgage costs.
What does it mean for savings?
Those with a significant amount of cash in savings pots will be less pleased about today's decision. The best easy-access savings accounts currently offer rates north of 5%, but they are unlikely to hang around for long now that the base rate has come down.
"Those that want to preserve their return must move fast by locking in the best deal possible while interest rates remain relatively high," says Alice Haine, personal finance analyst at Bestinvest.
"This is particularly important for anyone with money idling in an account offering an ultra-low return," she adds.
If you don't need to access the funds in your account in the short term, you could consider putting the money in a one or two-year fixed-rate account.
Many providers allow you to lock your cash away for even longer than this. However, if you have a time horizon of three to five years or more, you could be better off putting your money in the stock market.
Investment returns almost always beat cash over the long run, as long as you invest in a diversified range of stock market investments, manage risk appropriately, and keep your money in the market for a sufficient period of time (to ride out any short-term volatility).
What do interest rate cuts mean for the property market?
The property market has been fairly limp for much of this year, after high interest rates dampened house price growth.
However, the latest house price data from Nationwide shows house prices are up 0.3% month-on-month in July, with the annual growth rate picking up to 2.1% (up from 1.5% in June).
This is the fastest pace of growth since December 2022 – although Nationwide's chief economist Robert Gardner adds that prices are "still around 2.8% below the all-time highs recorded in the summer of 2022".
Falling interest rates should create a more supportive environment for house price growth going forward, but it will take some time. Mortgage costs aren't expected to come down precipitously or all at once.
Nevertheless, sellers will be hoping that the market is slowly shifting in their favour.
It has been a buyer's market so far this year, as high borrowing costs have resulted in a slowdown in sales. As a result, sellers have had to be more realistic about the prices they are willing to accept.
Sellers will be hoping to see more buyers coming to the market as mortgage rates come down. This could already be starting to happen.
"We’ve already seen monthly mortgage approvals sitting at consistently high levels as pent-up demand across the market has been released and, in recent weeks, mortgage rates have continued to trend downwards, with several five-year fixed-term mortgages available with rates below four percent," says Guy Gittins, chief executive at Foxtons.
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