Homeowners have been left waiting with baited breath as economists are divided on whether the Bank of England will cut interest rates for the first time in over four years on Thursday.
The last cut in the Bank of England base rate was on 19 March 2020. Days before the UK was plunged into lockdown, the Bank’s Monetary Policy Committee (MPC) held a special meeting where it cut rates from 0.25 per cent to 0.1 per cent because of the impact of Covid-19 on the economy.
The base rate currently sits at 5.25 per cent after being incrementally increased from this record low of 0.1 per cent between 2021 and 2023.
Now, forecasters are split as to whether the Bank MPC will drop rates when it unveils its August decision on Thursday.
Until recently, most economists expected the Bank would hold rates at their current level until September, but traders have dialled up bets on a cut in recent days, and it is now hovering around 50-50.
And major economic forecasters are now split on their predictions over the decision.
A cut to the base rate would mean a reduction in mortgage bills for those with tracker and variable home loans. Fixed rate mortgages could also drop too.
Capital Economics and Pantheon Macroeconomics are among the forecasters that think rates will be kept at 5.25 per cent for a little longer.
“While it will be a very close call, the economy’s recent strength and the stickiness of services inflation leads us to think that the Bank of England will wait until its September meeting to cut interest rates from 5.25 per cent to 5 per cent,” said Ruth Gregory, deputy chief UK economist at Capital Economics.
A briefing note from Pantheon Macroeconomics said: “We expect the MPC to vote six-to-three to keep Bank Rate on hold at next Thursday’s policy meeting. The MPC said its decision depends on GDP, services inflation and wages; all have exceeded its forecasts.”
But other forecasters are predicting a cut.
Deutsche Bank Research is forecasting five of the nine-strong MPC to vote for an interest rate cut.
“It’s a close call. But, we think, the case for a rate cut rests on a shifting reaction function within the MPC, including stronger reliance on its inflation projections, forward-looking indicators of wage and services prices, as well as firming real rates,” said Sanjay Raja, its chief UK economist.
BNP Paribas also forecasts five votes for a cut, but added in a briefing note: “With the August decision finely balanced, we see a clear risk that the MPC will wait until the September meeting.”
The Bank of England generally cuts interest rates when inflation is low, and ups rates when it is high.
Although inflation remained at the Bank’s target of 2 per cent in June’s reading, underlying price rises remained high.
Core inflation, which excludes volatile measures, such as food and energy prices, stayed at 3.5 per cent, the same as in May. Services inflation also remained at 5.7 per cent.
Mortgage rates are heavily linked to the Bank of England interest rate, which means a hold in August would spell bad news for households.
Savings rates are also linked to the rate though. A cut could mean that savings rates start to come down, meaning savers get a lower return for their cash.
