The Bank of England has cut the interest rate today from five per cent to 4.75 per cent, marking the second reduction this year.
The move follows August’s previous cut from 5.25 per cent to five per cent, which was the first decrease in more than four years.
The rate cut comes as UK inflation dropped unexpectedly to 1.7 per cent in September, its lowest level in three-and-a-half years and below the Government’s two per cent target.
This decline in inflation, coupled with wage growth slowing to its lowest pace in more than two years, has strengthened the case for reducing borrowing costs.
Joe Nellis is MHA’s economic adviser said: “Last week’s Budget may well have thrown a spanner in the works concerning interest rate policy going forward, but the Bank of England has remained committed to their rate-cutting plan – for now.
“While the BoE cut interest rates today to 4.75 per cent, we are unlikely to see a second cut in December because of the knock-on impact of measures announced in the Budget.
Savers are urged to take advantage of high interest rates whilst they last
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“The scale of public sector expenditure, combined with increases in the minimum wage and employer national insurance contributions leading to higher employment costs, will put upward pressure on prices.
“These factors, alongside rising household energy costs, mean we are likely to see inflation edging a little higher over the coming months, encouraging a more cautious approach to cutting rates from the BoE in the medium term.
“There is also a longer-term issue to be considered. With this Budget heightening domestic wage growth inflationary pressures, there is a risk of a continued wage-price spiral. The BoE will have to devise a long-term strategy for handling inflation, as the two per cent target is not likely to be met on a sustained basis for a few years.”
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Most analysts had predicted the 0.25 percentage point reduction, reassuring homeowners that this change would make borrowing cheaper for households.
Homeowners with tracker mortgages could see significant savings from today’s expected rate cut, with monthly payments potentially dropping by £32, or £384 annually, figures from TotallyMoney show.
When combined with August’s previous rate reduction, tracker mortgage holders could benefit from total savings of £63 per month, amounting to £756 per year.
Although welcome relief for homeowners, savers are likely to see reduced returns following the rate cut.
Rachel Springall, of financial information company Moneyfacts, warned: “Savers are the ones who feel the force of cuts to interest rates. Those savers who use their interest to supplement their income will feel overlooked if rates plummet.”
Experts advise savers to shop around for the best deals, noting that loyalty to older accounts often results in lower interest rates.