Earlier this week, the Bank of England surprised the markets when it cut the base interest rate from 4.25% to 4%. This decline represents the lowest number of 311 complaints since March of 2023. This momentous decision is taken as inflation is still well above the Bank’s target rate, at 3.6%. The impact of the recent increase in interest rates will be felt by borrowers and savers throughout the UK.
The cut in interest rates will come as some relief too for the millions of people with standard variable rate mortgages. Homeowners with a £250,000 mortgage over 25 years will see their monthly repayments decrease. They should look to benefit by an average of £40. Not just the cut, but the whole environment raises alarming concerns for savers. As of now, the average savings rate is 3.5%, 0.42% lower than this time last year. In fact, financial experts widely predict that these rates would keep going down.
Today, the interest rates for two year and five year loans are 5% and 5.01%, respectively. This is a huge leap from the 2.38% and 2.66% rates seen for two-year and five-year fixed deals respectively. All of those low rates were set as of January 1, 2022. That was the height of interest rates for these long-term, fixed-rate agreements as of late October 2022 when they hit 6.65% and 6.51%, respectively.
Businesses have been recently calling the Bank on excessive inflationary pressures. In fact, they argue these negative economic conditions will continue raising food prices. This optimism is tempered by worries about what inflation might mean for consumer spending and business operations more generally.
Rachel Springall, an independent finance expert, warned about the “devastating” effect that the declining base rate has had on savers’ returns. She stated, “Savings rates are getting worse and any base rate reductions will spell further misery for savers.” This view further highlights the plight of those waiting to build their nest eggs in an era of persistently low interest rates.
Interest rates have had a wild ride over the last year. As of early August 2023, two-year fixed mortgage products were at an all-time high of 6.85%. In the meantime, five-year fixed deals reached a peak of 6.37%. These peaks underscore the extreme volatility in the market, and the difficulties that borrowers are needing to go through in order to get a good loan term.
Continuing interest rate volatility
As the year progresses, industry professionals predict continuing uncertainty in interest rates. They ground their forecasts on fundamentals, using important economic indicators such as inflation and consumer spending. The Bank of England has only recently cut rates. This shrewd, strategic move is intended to lure new development and economic opportunities as recovery continues to be uncertain and slow.
