Millions of homeowners and first time buyers were handed a major boost today when the Bank of England slashed another quarter point off interest rates.
The decision, which was widely expected in the City, brings the Bank’s benchmark rate down from 5% to 4.75%, its lowest level since June last year.
It follows a similar move by the Bank in August which was the first cut for four years.
The Bank’s rate setting Monetary Policy Committee (MPC) voted by eight to one to lower the cost of borrowing again after seeing inflation ease more quickly than forecast to just 1.7% and wage growth slow.
But Governor Andrew Bailey warned any future cuts will only happen “gradually”. He said the Bank “can’t cut interest rates too quickly or by too much” given continuing inflation concerns.
Today’s move will mean an immediate reduction in bills for borrowers on variable or tracker rate deals linked to Bank of England rates, although they only make up about 15% of the total.
The monthly repayment on a typical London £300,000 mortgage will fall by about £42 from £1,667 to £1,625. However, the vast majority who are on fixed rates will see no immediate change in their bills until they come to remortgage.
However it is more good news for first time buyers looking to raise funding for a purchase to get them on the property ladder and can be expected to feed through to more activity in the market. Lender Halifax this morning revealed that the average UK house price reached a new all-time high last month.
However, the Bank said the Budget measures, which included a huge increase in public spending would “boost CPI inflation by just under ½ of a percentage point at the peak, reflecting both the indirect effects of the smaller margin of excess supply and direct impacts from the Budget measures”
It added.: “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.”
But one leading economist said the Bank should have been bolder. Carsten Jung, head of macroeconomics at thinktank IPPR, said: "Given low inflation and slow growth, the Bank of England should have cut rates by more. A further and faster rate cut is needed to support economic recovery.
“The Bank of England confirmed that the new government's budget will likely improve economicgrowth. Wethink it is unlikely to put much upward pressure on inflation, consistent with recent evidence from the US. This should encourage the Bank of England to be bolder in reducing interest rates.
“Separately, the Treasury transfers about £20 billion annually for quantitative easing losses at the Bank of England—funds that could cover half of last week's increase in the public services spending. The UK is an international outlier in this practice, which should be reconsidered."
Thomas Pugh, economist consulting firm RSM UK, said: “Today’s 25bps cut will likely be the last this year as the big fiscal loosening announced in the budget materially increases growth and inflation over the next two years. We currently expect the MPC to cut once a quarter next year, but Trumps US election victory raises the prospects of higher inflation globally, which means the risks are skewed towards fewer rate cuts.”
Dominic Agace, chief executive of estate agents Winkworth, said: ”A further reduction is welcome and after a small wobble around the Budget, provides reassurance that the property market will continue on the path to recovery. We have seen applicants register to buy 12% ahead of last year and 9% ahead of the 3 year average, down from 18% and 11% in the the weeks before. We would expect this positive and anticipated step to reverse this slight drop.”
Paul Noble, CEO of Chetwood Bank, said: “This decision is significant. Today's cut is a signal of intent and confidence from the Bank of England. Buoyed by positive inflation news, even a degree of market volatility after last week's Budget and the reaction to the US election results has failed to deter the central bank from its path, suggesting more rate cuts could follow in the months ahead as it attempts to spark greater growth and investment across the UK economy. “
The City had been pencilling another downward move next month but this is now thought likely to be put on hold following the Budget which is seen as inflationary largely due to billions of extra taxes on business.
The bosses of Marks & Spencer and Sainsbury’s have both this week warned of the inflationary impact of the hike in employers’ NI coming into effect next April.
