Bank of England base rate sticks at 4% as markets react to last month’s cut

Consumers may need to take action as the future direction of interest rates is cloudy.

There’s uncertainty over when we’ll next see a cut to the UK’s central interest rate, after it was today revealed the Bank of England’s Monetary Policy Committee (MPC) voted to maintain the base rate at its current level of 4%.

It had been hoped last month’s 0.25 percentage point reduction would inspire greater economic growth and strengthen the jobs market. However, it’s become clear the Bank may need to consider a more measured approach as latest figures found UK inflation is proving stubborn and remains at its highest level in more than 18 months (3.8%).

Time for savers to “ditch and switch”

Savers at least will be grateful for a reprieve from falling rates, as many banks and building societies acted swiftly to pass the five base rate reductions since August last year onto their variable accounts.

In the month to September alone, the average rate paid by an easy access savings account and easy access ISA each dropped by 0.08 percentage points to 2.60% and 2.82%, respectively. Meanwhile, typical returns on a notice account and notice ISA fell more dramatically over the same time frame, by 0.10 percentage points to 3.53% and 0.12 percentage points to 3.37%, respectively.

“It might be disheartening for savers to find the rate on their account has been cut over the past month, but now is not the time to become apathetic,” said Rachel Springall, Finance Expert at Moneyfactscompare.co.uk.

“Those with cash stashed away for convenience with one of the biggest high street banks will find they pay an average of 1.52%¹ across easy access accounts,” she explained.

In fact, only a quarter of all savings accounts on the market pay more than the Bank of England base rate which means many are at risk of having their hard-earned cash lose value to inflation in real terms.

“Now is the time for savers to ditch and switch elsewhere, such as to mutuals or challenger banks that are paying attractive rates,” said Springall.

Borrowers: Don’t be distracted

While a base rate reduction often helps to bring down the cost of borrowing, fixed mortgage rates fell by smaller margins between August and September than seen in previous months - despite the most recent cut.

This is likely because lenders tend to pre-empt changes to the base rate when setting their fixed pricing. With doubt over when the central interest rate will next be lowered, the average rate charged by a two-year fixed mortgage dropped by a modest 0.05 percentage points month-on-month to 4.96%. Meanwhile, the average five-year fixed mortgage rate decreased by just 0.01 percentage points to 5.01%.

In contrast, the average 10-year fixed mortgage rate rose by 0.07 percentage points and, at 5.67%, is higher than a year ago.

“Uncertainties surrounding the outlook for interest rate moves have been evident over recent weeks, with volatile swap rates leading to a more cautious approach from lenders to make any significant changes. Not only this, but many will be waiting with bated breath for the Budget,” said Springall.

“This waiting game, alongside forecast for inflation to remain above target, makes it less likely for the Bank of England to make further rate cuts this year,” she explained.

In the meantime, borrowers sitting on their lender’s Standard Variable Rate (SVR) could expect to pay £363 more per month than if they opted for an average-priced two-year fixed deal².

It’s for this reason that Oliver Dack, Spokesperson for Mortgage Advice Bureau, is urging people not to delay locking in a new fixed rate:

“Last month’s base rate cut couldn’t counteract a summer slump in consumer appetite. But now, with people having returned from their holidays and children back at school, we’re encouraging borrowers to find the time to review their mortgage rates – particularly those coming to the end of their current fixed deal.”

“While some may be tempted to wait until after the Chancellor of the Exchequer delivers her Autumn Budget in November before booking a new deal, there are no guarantees as to what’s in store. The mortgage market can easily be spooked – as was seen in the wake of the tumultuous mini-Budget around three years ago,” Dack added.

“Instead, it’s important borrowers shake any distractions and focus solely on their own circumstances. Locking into a fixed deal can offer sense of security in the face of an uncertain future and is often a cheaper alternative to falling onto a lender’s SVR.”