Approved Finance Group: Understanding the Latest Bank of England Base Rate Cut and Its Implications for Borrowers
The recent decision by the Bank of England's Monetary Policy Committee (MPC) to cut the base rate by 0.25 percentage points, lowering it from 5% to 4.75%, is likely to affect both the inflation outlook and mortgage markets in the UK. This decision, only the second base rate cut in 15 months, reflects a strategic response to ongoing economic conditions, although it arrives with mixed implications for consumers and businesses.
Impact of the Base Rate Cut on Inflation and Interest Rates
The Bank of England has forecast that Chancellor Rachel Reeves's recently unveiled budget could push inflation up by as much as half a percentage point over the next two years. The £70 billion in tax and borrowing measures announced in her first budget is expected to fuel this increase, potentially slowing down the anticipated trajectory of rate reductions.
According to the MPC, this budget could delay inflation’s return to the 2% target until the first half of 2027—about a year later than initially forecast. The MPC minutes noted a significant upward shift in the "market-implied path for the Bank rate," suggesting fewer cuts ahead and a potential need for sustained caution in base rate adjustments.
Governor Bailey’s Stance: Progress Amid Persistent Inflationary Pressures
Bank of England Governor Andrew Bailey pointed out that, despite recent increases in inflationary pressure from the budget, the overall trend remains one of "continued progress in disinflation." Nonetheless, this complex economic picture implies that the pace of base rate cuts could be slower than borrowers might hope, as the Bank remains wary of inflation’s potential resurgence.
Mortgage Market Outlook: Limited Short-Term Rate Relief for Borrowers
Homeowners, first-time buyers, and commercial mortgage holders may find some relief in the base rate cut, but a direct pass-through to lower mortgage rates is not guaranteed. Josh Evans, a senior mortgage broker with David Williams Mortgage & Insurance Services, highlights that banks set their rates based on a blend of the base rate, business performance, and the state of the swap markets—a critical factor tied to the Bank’s anticipated rate-cutting speed.
Recent swap market behaviour suggests that while markets initially reacted positively to a dip in inflation in September, the Chancellor’s budget has cooled optimism for rapid rate reductions. Consequently, mortgage lenders may adopt a wait-and-see approach, with the potential for slight increases in lending rates if swap rates respond to inflationary pressures.
How Budget-Driven Inflation Could Shape the Borrowing Landscape
The minutes from the MPC’s November 7 meeting noted that the budget could cause a peak increase of up to half a percentage point in the Consumer Price Index (CPI), due in part to the narrowing margin of excess supply and direct effects of fiscal measures. This scenario suggests a more cautious approach from the Bank, which may limit the rate-cutting scope over the next year. Current forecasts from the Office for Budget Responsibility (OBR) project a base rate floor of 4% by the end of 2025, adjusting prior predictions by 0.25 percentage points to account for inflationary pressures from the new budget.
Recent Developments in Mortgage Rates: High Street and Commercial Lenders Respond
With the MPC decision, residential mortgage rates had already risen, as lenders anticipated shifts in monetary policy and adjusted their offerings. Major lenders, including HSBC, Coventry Building Society, and Virgin Money, have re-priced their mortgage products, reflecting heightened caution in response to the evolving economic landscape. Commercial lenders have also reacted, with Interbay notably increasing its arrangement fees by 1% across its entire product portfolio.
These adjustments underscore the continuing influence of macroeconomic conditions on the mortgage market. Further re-pricing activity may continue, especially as markets remain vigilant in the lead-up to the next MPC meeting on December 19, where new developments could again shift lending policies.
What’s Next for Borrowers?
Borrowers should prepare for a possibly prolonged period of high base rates, with limited and gradual reductions. The shift in inflationary forecasts, fueled by fiscal policy changes, indicates that mortgage rates might remain elevated in the near term. Although the latest base rate cut suggests that relief is on the horizon, it is unlikely to be immediate or substantial.
For those seeking new mortgages or planning refinancing, the landscape calls for strategic timing and a cautious approach. Understanding how lenders are responding to the base rate and inflation expectations, and exploring options with experienced brokers, may help borrowers navigate this evolving environment effectively. As always, Approved Finance Group is here to provide guidance and support as you make decisions in a challenging but manageable market.