Bank of England holds interest rates at 5%

The Bank of England has announced it will keep interest rates on hold at 5% for at least the next two months. The decision is a blow for households and businesses struggling with high borrowing costs, but one that was widely expected. 

The decision from the Monetary Policy Committee (MPC) was clear-cut, with members voting 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. 

It comes after interest rates were cut from their 16-year high of 5.25% on 1 August. Experts had warned the likelihood of another rate cut today was slim, after the Bank of England set a cautious tone in its comments last month. 

Subscribe to MoneyWeek

Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE

Get 6 issues 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

Sign up

Since then, inflation has inched up to 2.2%, and services inflation and wage growth remain elevated at 5.6% and 5.1% respectively. What’s more, inflation is expected to rise further later this year when energy prices go up. 

The next MPC meeting won’t take place until November, at which point a rate cut looks more likely. Markets have been pricing in one to two more cuts before the end of the year, with November looking like the most likely month. 

Economists are slightly more cautious, though. In the latest poll from news agency Reuters, 49 out of 65 survey respondents said they expect just one more cut in 2024. Forty-eight said it will come in November, while just one opted for December. 

Laura Suter, director of personal finance at AJ Bell, says: “The lack of a meeting in October means the Bank avoids the thorny issue of making a decision on interest rates immediately ahead of the Budget, and gives time to digest the government’s fiscal plans before making its next decision at the start of November.” 

Will interest rates continue to fall?

Although the base rate hasn’t budged this month, experts agree that interest rates are on a downward path going forward. The question is how fast and how far they will fall. Many have been pointing to the old adage that rates tend to rise like a rocket but fall like a feather.

In its summary comments today, the MPC said there had not been any "material developments" in the economic data since it last met in August. As a result, it concluded that "a gradual approach to removing policy restraint remains appropriate". 

The MPC then reiterated a statement that has appeared in previous summary documents: "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."

The Bank of England will watch the economic data closely when assessing the timing of its next rate cut. It is likely it will want to see further progress in areas like wage growth, giving the MPC comfort that domestic inflationary pressures are firmly in the rearview mirror.

“The rate of wage increases is still running at more than twice the rate of consumer price growth and there are still niggles of worry that those high wage bills might be passed on as higher prices for goods and services,” says Susannah Streeter, head of money and markets at Hargreaves Lansdown. 

Despite ongoing pressures, the rate-cutting cycle now appears to be underway across large parts of the world. Last week, the European Central Bank (ECB) cut interest rates to 3.5% – its second cut this year. Yesterday, the US Federal Reserve also joined the rate-cutting club, opting for a bumper cut of 0.5%. 

It comes as concerns about economic growth have been ramping up. Weak labour market data prompted fears of a US recession over the summer, causing a rout in global equity markets. Meanwhile, here in the UK, the latest GDP figures show the economy stalled for a second month in July, experiencing no growth at all. 

Ed Monk, associate director for personal investing at Fidelity International, says: "The strength of the MPC's vote [...] perhaps suggests that the Bank sees a period of below-potential growth as being necessary to get the last bit of high inflation under control. It means borrowers will have to be patient in their wait for rates to fall, even if that is now the direction of travel."

What do frozen interest rates mean for savers?

The MPC’s decision to keep rates on ice will come as good news to savers, who have seen savings rates tumble since the Bank of England’s first cut on 1 August. 

Despite this, savers will need to act quickly to take advantage of the best deals, as savings rates often fall in anticipation of cuts as well as in response to them. With one to two more cuts expected before the end of the year, savings rates are on a downward trajectory. 

“Those who are happy to lock their cash away for a guaranteed return could look towards a fixed-rate bond or fixed cash ISA, and with rates expected to decrease further, savers may wish to choose a longer-term deal,” says Rachel Springall, finance expert at Moneyfacts.

While speed is of the essence, savers should still take time to shop around as savings rates vary enormously between the most and least-competitive providers. 

“Challenger banks and building societies continue to offer some of the top returns and have the same deposit protections in place as the more familiar high street banks, so there is little reason to overlook them in favour of a well-known brand,” Springall adds. 

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. 

What does the Bank of England’s decision mean for mortgage holders? 

Mortgage rates have been coming down in recent months, both in anticipation of base rate cuts and in response to the MPC’s decision on 1 August. Competition between lenders has brought rates down further since, and some sub-4% deals are now available on the market.

Despite this, mortgage rates remain high compared to the levels seen in the late-2010s. Furthermore, around 1.6 million mortgage holders will see their deals expire this year, according to trade body UK Finance. 

Unfortunately, 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 when they remortgage. A second base rate cut would have been helpful in reducing the strain on these borrowers. 

“Their next big decision centres on whether it is best to lock in another fixed-rate deal, or whether a tracker might work out best over the longer term," says Alice Haine, personal finance analyst at Bestinvest. 

"Whatever option they choose, committing to a new deal is key otherwise they risk reverting to their lender’s ultra-expensive standard variable rate, with the average SVR remaining high at just below the 8% mark," she adds. 

Despite this, there could be good news for homeowners looking to sell. The housing market has been dampened by higher mortgage rates since prices peaked in the summer of 2022, but the outlook is now starting to improve. Further interest rate cuts later this year could bring more buyers to the market, giving house prices a boost. 

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.

Is now a good time to buy an annuity?

Those planning for retirement may be wondering whether now is a good time to buy an annuity before interest rates fall further. After the base rate held steady today, savers now have a little longer to contemplate their decision – but they shouldn’t leave it too long. 

After years in the doldrums, annuities are now offering decent value for money. The latest data from Hargreaves Lansdown’s annuity search engine shows a 65-year-old with a £100,000 pension can get up to £7,102 per year from a single-life level annuity. 

Despite this, annuity rates have probably peaked as the amount of income you can earn from an annuity is linked to government bond yields, which are influenced by the underlying interest rate environment. 

“The prospect of cuts looming on the horizon in the coming months does mean we can expect to see incomes shift downwards, though it’s fair to say they will not fall anywhere near as far or as fast as they were hiked,” says Helen Morrissey, head of retirement analysis at Hargreaves Lansdown. 

“This means we should continue to see strong interest in people looking to secure a guaranteed income from the annuity market, though it is vital to make sure that you check quotes across the market before making a final decision,” she adds. “Simply opting for the first quote could see you thousands of pounds worse off over the course of your retirement.”

While annuity rates look fairly good right now, that doesn’t mean they are the right retirement strategy for everyone. Some people prefer to keep their pension pot in drawdown or opt for a combination of the two approaches (drawdown and annuity). Using your pension pot to buy an annuity is an irreversible decision, so you need to think carefully before making your mind up. You should seek financial advice if you are unsure.