On Thursday, the Bank of England announced a reduction in the base interest rate from 5.25% to 5%, marking the first such cut since 2020. Governor Andrew Bailey noted that this decision stems from easing inflationary pressures, but he cautioned that homeowners should not anticipate a swift drop in borrowing costs. The decision, made after a narrow vote, brings some relief to homeowners who will see a reduction in mortgage expenses; however, it could lead to banks lowering their savings rates as well.

Bailey emphasized the importance of maintaining low inflation and warned against making aggressive cuts to interest rates. This indicates that any future rate reductions are expected to be gradual after having risen quickly in recent years. Economists generally predict that rates will remain stable during the committee's next meeting in September, although another cut might occur in November.

Former Prime Minister Rishi Sunak expressed concerns that recent wage increases for public sector workers, including those in the NHS, could heighten inflationary pressures. Despite these concerns, the Bank has assessed that the impact of these pay rises will not be significant on overall inflation. Chancellor Rachel Reeves acknowledged that while homeowners should welcome the rate cut, many are still grappling with elevated mortgage rates that followed the controversial mini-Budget of former Prime Minister Liz Truss.

This recent base rate reduction will mean that homeowners with tracker mortgages could see an average reduction of over £340 annually. Additionally, around 700,000 fixed-rate mortgage agreements are set to expire in the latter half of the year, potentially allowing borrowers to secure lower rates. Although this cut signifies a shift, it remains far from the extremely low rates seen between 2008 and 2021, when the rate seldom exceeded 0.75%.

The surge in interest rates has significantly increased the financial burden on homeowners, with an estimated 1.6 million mortgage holders expected to face substantial payment hikes when their fixed-rate terms conclude this year. Senior economist Carsten Jung from the IPPR think tank criticized the Bank of England for delaying the interest rate cut, arguing that it has impeded the UK’s economic recovery. He pointed out that the economy still lags behind its pre-pandemic growth trajectory and urged the Bank to take decisive action in signaling further rate reductions as inflation expectations normalize and the labor market shows signs of cooling.