In its latest Monetary Policy Committee meeting, the Bank of England voted to hold the Bank Rate to 4.75pc, in what may be a sign of things to come.
While markets previously expected another reduction before the end of 2024, confidence fell after Labour’s Budget pushed up borrowing costs and inflation rose in November to 2.6pc from 2.3pc the month before.
The decision to reduce the rate from 5.25pc to 5pc on August 1 marked the first reduction in two years and many hoped it would kick off a rapid downward cycle. However, global uncertainty and rising costs and wages have poured cold water on the hope of multiple Bank Rate cuts next year. The market is now pricing in a maximum of two cuts, influenced by the Federal Reserve in the US that is only expected to make one.
Falling Bank Rates – even slowly – are broadly good news for mortgage holders and first-time buyers, as mortgage deals tend to follow central interest rates. However, other factors, such as swap rates, can also affect the interest charged by lenders.
For savers, meanwhile, lower Bank Rates can mean a cut to savings interest.
Here, Telegraph Money explains what the Bank Rate outlook means for your mortgage, savings, pension and investments.
First-time buyers and homeowners remortgaging
While those already on a fixed-rate mortgage will be unaffected by any Bank Rate decision, the 1.8 million people needing to remortgage in 2025 still have little chance of their mortgage costs going down, despite falling rates, because of how cheap home loans were two years ago.
Currently, the average two-year fixed rate is 5.46pc and the five-year fix is 5.23pc, according to the analyst Moneyfacts, though the best deals will be cheaper.
The direction of mortgage rates has been mixed in the past few weeks as swap rates – the main pricing mechanism for fixed rate mortgages – have moved. Natwest, Santander and Barclays lowered rates last week despite expectations the Bank of England would hold its benchmark Bank Rate
Nicholas Mendes of broker John Charcol said: “The Bank of England’s decision to hold the base rate at 4.75pc comes as no surprise, given the challenging economic landscape the MPC is navigating. While October’s Budget has provided a short-term boost to the economy, it has also introduced new pressures that are likely to keep inflation elevated for longer than previously anticipated.”
Mortgages
Any Bank Rate move usually has an immediate impact on those on a variable-rate deal.
According to UK Finance, the banking trade body, there are 643,000 homeowners with tracker mortgages and 679,000 on a standard variable rate.
Due to continual Bank Rate rises between 2021 and August 2023, those who gambled on tracker mortgages have long been waiting for a reprieve.
Tracker mortgages are tied to the Bank Rate, so mortgage holders with this kind of deal are likely to see their bills get cheaper after today’s rate cut.
The average two-year tracker rate is 5.47pc, according to Moneyfacts. The average standard variable rate (SVR) as of 1 December is 7.85pc, which has fallen from 8.16pc since the start of August.
Lenders are free to change their SVR whenever they wish, but many have already passed on last month’s rate reduction.
Borrowers are automatically put onto their lender’s default SVR if they do not remortgage on to a new deal when their original fixed-rate or tracker deal comes to an end.
Savings
Since August’s rate cut, savings rates have begun to fall more quickly. The average easy-access saving rate is 2.90pc, according to Moneyfacts, down from 3.15pc in August.
The highest rates pay almost 5pc, so it still pays to shop around.
Savers can get slightly higher rates in an easy-access cash Isa account, which pays 3.06pc on average. Returns on Isas are tax-free, and up to £20,000 a year can be spread across multiple accounts.
Rachel Springall, of Moneyfacts, said: “It would not be surprising for savers to feel disheartened entering 2025, and others may have an apathetic attitude to save if rate competition stalls. However, it’s imperative that consumers put some time aside to save little and often to build up a nest egg as an emergency safety net and switch often to ensure they are getting the best return they can on their hard-earned cash.
“Loyalty does not always pay, and savers may be getting an exceptionally awful deal if they have their cash stashed with one of the biggest high street banks. The average easy access rate paid across the biggest high street banks is 1.79pc, which is far less than the current market average easy access rate across all savings providers.”
Pensions
Most savers should not make changes to their pension based on the Bank Rate, as the further you are away from retirement the more time you have to recover any losses in the stock market.
However, now we have reached the end of this rising interest rate cycle the annuity market will cool down.
Annuities exchange a lump sum for a guaranteed income in retirement. Before interest rates started rising, they had long been out of fashion as they offered very low payout rates. However, in the past year they have risen to heights not seen since the 2000s.
William Burrows, a financial adviser at Eadon & Co, said: “Annuities are now quite a hard act to beat for those who want to maximise returns from pension pots, whereas they weren’t in the past.
“We’re probably at the top of the annuity rate cycle for the time being. I’m not expecting dramatic falls, but rates will ease off as inflation comes under control and interest rates fall.
“Now is a good time to buy an annuity, but it’s when people want peace of mind and security of guaranteed income – that’s the real time people should be thinking about buying one.”
Investments
Labour’s Budget is expected to cause an inflationary increase in the coming months, due to Rachel Reeves’ plans for extra spending. Inflation rose in October and November to 2.3pc and 2.6pc, respectively. This, coupled with Donald Trump’s presidential win bringing the prospect of tariffs impacting UK-US trade means the longer-term view of rate cuts could be slower than predicted.
Tim Parkes, CEO of RAW Capital Partners, said: “Any rate reduction is positive news for the lending and property markets. Although rates may never return to the historic lows seen between 2008 and 2021, they are trending in a favourable direction, making it easier for homeowners and investors to manage both current and future loans.
“Looking ahead to 2025, we expect specialist finance demand to grow, provided that brokers and lenders can support borrowers with the financial products and expertise they will need to navigate the changing political and economic landscapes with confidence.”
Lower interest rates can provide a boost to the valuations of certain companies, such as those that are prized not for their profits today but the prospects of their future earnings. These are worth more if inflation and rates are expected to fall.
However, an investment portfolio that is invested across the entire global stock market is likely to be influenced more heavily by the American central bank’s decisions rather than those made on Threadneedle Street. Even the companies that make up the FTSE 100, London’s benchmark index, derive most of their revenues from overseas.
The US Federal Reserve cut interest rates on Wednesday but is not expected to make more than one reduction next year.
Meanwhile, the European Central Bank cut its rate to 3.5pc earlier this month. The bank made its first cut to rates earlier this year, with a 0.25 percentage point trim in June.
