Bank of England reduces base rate to 5%
The Bank of England has announced a reduction in the base rate by 0.25%, bringing it down to 5%. This move follows a prolonged period of the base rate being stuck at 5.25% for 11 months, having rapidly increased from a low of 0.1% in November 2021. The higher base rates were initially implemented to control inflation, which has now returned to the Bank’s target of 2%.
While the decision to cut the base rate was finely balanced, it is expected to be welcome news for businesses and households. This adjustment suggests a potential decrease in borrowing costs, though the extent of further reductions remains to be seen.
City economists are forecasting that the base rate may fall to between 4.6% and 4.7% by the end of 2025. Despite this, the cost of a mortgage is not directly determined by the Bank of England’s official base rate. Lenders primarily source their finance for fixed-rate mortgages from the money markets, with the cost influenced by anticipated base rate movements among other factors. Most mortgage borrowers are on fixed-rate loans for two or five years.
Over the past three years, uncertainty regarding the base rate outlook has caused mortgage rates to fluctuate between 4% and 6% for a typical five-year fixed rate at 75% loan-to-value (LTV). These fluctuations have been driven by financial markets and their expectations for future borrowing costs.
At the beginning of 2024, there were expectations of multiple base rate cuts in the second half of the year. However, these expectations have since been scaled back, leading to an increase in average mortgage rates above 4.5% for five-year fixed-rate loans in recent months.
The reduction in the base rate could result in mortgage rates returning to levels seen earlier in the year. However, this will depend on market perceptions of base rate trends heading into 2025.
