Borrowers may have to wait until the end of the year for the next rate cut as experts believe the Bank of England will keep the base rate at 5% tomorrow.
This morning it emerged that inflation remained stable at 2.2% in August, further reinforcing the view that interest rates would remain the same tomorrow when the next meeting of the Bank’s decision-makers is scheduled.
In August, the Bank’s Monetary Policy Committee (MPC) made the first cut in the base rate in four years, dropping the rate from 5.25% to 5%.
It was hoped that they would make another cut at their meeting on Thursday 19 September and over the past week this has started to look more likely, especially after the GDP figures showed the economy had come to a standstill in July.
But more recently, sentiment has turned toward the next cuts at the end of the year.
Laura Suter, director of personal finance at AJ Bell, said: “There are no expected changes in interest rates later this week, with the Bank expected to keep rates at 5% after the August rate cut. The Bank has been keen to reiterate that it will not be too quick to cut rates, meaning that holding rates this month would meet that playbook.”
She added: “After this week’s decision we have two more decisions before the year is out, in November and December. The lack of an October meeting means the Bank avoids the thorny issue of deciding on interest rates just before the budget, and has time to digest the government’s budget plans before making its next decision in early November .
“Either way, rates are expected to end the year at 4.5% – signaling two successive cuts before Christmas.”
How will inflation at 2.2% affect interest rates?
With inflation remaining at 2.2%, just inches away from the 2% target, the MPC is less likely to make a rate cut tomorrow.
Alice Haine, personal finance analyst at Bestinvest by Evelyn Partners, explained more. She said as core inflation, which excludes more volatile items such as food, alcohol and tobacco, rose 3.6% in the 12 months to August, inflationary pressures could still persist. This meant the Bank of England had ‘some more thinking to do’ ahead of its interest rate decision tomorrow.
“Traders have increased their expectations that the BoE will make a second rate cut this week – although most economists still expect the base rate to remain unchanged at 5%,” she said.
Haine added: “Those pinning their hopes on a second rate cut to ease their credit problems will likely take some comfort in the number of major lenders already cutting mortgage rates.
“The number deals with a fixed interest rate of less than 4% Available credit is increasing, with some lenders even expanding this to a two-year fix, as competition increases. A surprise rate cut tomorrow could catalyze the mortgage market even further, with rates falling at an even faster pace. “
What consequences does this have for your mortgage?
Mortgage advisers are also urging borrowers looking for a new deal to focus on the fact that mortgage rates have been cut, which will have helped budgets long before the BoE made its interest rate decisions.
David Hollingworth, associate director at L&C Mortgages, said: “Although [inflation is] above the 2% target rate, today’s stable figure should not change expectations that another rate cut could happen soon.
“This is unlikely to happen in tomorrow’s MPC announcement and the decision to cut last month was 5-4 in favor.
“However, it should not detract from progress on mortgage rates, which have once again changed rapidly as lenders have enthusiastically reduced their fixed rates.
“This has led to a substantial improvement in the available mortgage options two-year fixed interest rates now join five-year deals below the 4% mark.
“Competition between lenders remains fierce and they have continued to review prices regularly to try to keep pace with their peers. This will help ensure that interest rate improvements continue to come for mortgage providers as the focus shifts to tomorrow’s base rate decision.”