Bank of England cuts base rate to 4.0% as UK economy slows
The Bank of England has cut its base interest rate from 4.25% to 4.0%. This widely expected move comes as the UK battles weak economic growth. And experts are predicting another rate cut before the end of the year - even as inflation hit 3.6% in June, nearly twice the Bank of England’s 2% target. What does this mean for you? We’ve covered all you need to know, including how this impacts mortgage affordability and saving rates.
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Why has the base rate been cut?
The Bank of England voted to cut the base rate to 4.0% to support the economy amid sluggish growth and a weakening jobs market, despite ongoing divisions among policymakers over stubborn inflation. GDP is estimated to have dropped by 0.1% in May, following a fall of 0.3% in April. The closely watched Purchasing Managers’ Index (produced by S&P Global) also showed sluggish growth in business activity in May and June. Private-sector wage growth, though slower than the 8% peak two years ago, is just under 5%. This is still about 2% higher than pre-pandemic, and the roughly 3% level most policymakers want it to hit to be consistent with lower inflation.
But the Bank is having to balance strengthening the UK economy with sticky inflation. Over the last few years, inflation has been on a rollercoaster - peaking at 11.1% after 2022’s energy shock, then dropping to 1.7% by September 2024. Since then it's climbed back up, reaching 3.6% in June and potentially heading for 4%, double the Bank’s 2% target.
Some believe a lower base rate is needed to prevent inflation from undershooting the target as the economy slows, while others worry that persistent price pressures - especially in services and food - could keep inflation elevated for longer. The Bank now says inflation won’t hit the 2% target until early 2027 - a slower return to “normal” than in the US or euro zone.
What does this mean for mortgages?
If you’re already on a variable or tracker rate mortgage deal, it’s likely you’ll see your rate reduce following today’s announcement, reducing your monthly payments. If you’re looking to remortgage onto a new deal or get a mortgage for your house purchase, keep in mind that future base rate cuts are usually factored into fixed-rate mortgages before a cut is announced.
This is why in recent weeks we’ve seen some of the big mortgage lenders cutting rates by as much as 0.3%, and the best priced two-year fixed rate mortgage from our panel of over 20,000 mortgages is just below 3.8%*, rather than above the base rate. Looking ahead, lenders are likely to reduce rates gradually, and as ever, future reductions are not guaranteed, so if you’re able to remortgage or buy now, it might looking at your options sooner.
The good news is, if you lock in a mortgage deal through Tembo for your upcoming home purchase or remortgage, you can use our ✨free rate-checking service✨ if rates fall. Just contact your dedicated broker, and they'll reapply for you at no extra cost!
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*Based on Tembo's lender panel, the lowest 2-year fixed-rate mortgage deal is 3.73%, based on a 60% LTV or lower.
Full terms and conditions of our rate checking service can be found here.
What does this mean for savings?
When the base rate drops, this affects the interest rates that savings providers can offer. So it’s likely that savings rates will drop in response to today’s announcement. With inflation above most savings account rates, ensuring you're saving with a competitive interest rate is crucial to ensure the purchasing power of your money isn't eroded by inflation. The average interest access savings rate is sitting at just 2.38%, while the average variable cash ISA savings rate is 1.9%. Ensuring your savings are earning competitive interest rates is vital to make your money work harder for you and protect your purchasing power from inflation.
At Tembo, we always strive to deliver the best savings rates to our customers. That’s why the rates on both our easy access Cash ISA and market-leading Lifetime ISA are above the base rate, helping you to get even more from your savings.
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Tax treatment depends on individual circumstances and may be subject to change in the future. You must be 18 to open an ISA, and can save or invest up to £20,000 into one or more ISAs each tax year (up to £4,000 into a Lifetime ISA).
