Interest rates are FINALLY cut from 5.25% to 5% as the Bank of England gives struggling Brits respite - despite fears Labour's public sector pay splurge could have dashed hopes

Struggling Brits were finally given some respite today as the Bank of England cut interest rates.

The Monetary Policy Committee reduced the cost of borrowing to 5 per cent from the 16-year-high of 5.25 per cent - where it has been since last August.

Members voted by a knife-edge 5-4 to lower the base rate, with governor Andrew Bailey swinging the decision - amid hints that the level will not come down quickly in the coming months. 

Optimism about a cut had been boosted by inflation returning to the Bank's 2 per cent target after nearly three years of rampant cost of living pressures. 

However, stubborn price rises in the services sector - partly driven by the boom from Taylor Swift's Eras tour - raised doubts about whether the MPC would act before September. 

And those reservations were fueled by new Chancellor Rachel Reeves signing off a swathe of inflation-busting pay hikes for the public sector this week.

Ms Reeves said the reduction was 'welcome' but insisted that millions of mortgage-payers were still suffering due to Liz Truss's mini-Budget. 

But the Tories said it showed that Labour 'inherited a stronger economy which was on the right track'. 

The MPC report said it had upgraded expectations for the economy this year, and inflation would nudge up this winter before fading away again. 

'The Committee expects the fall in headline inflation, and normalisation in many indicators of inflation expectations, to continue to feed through to weaker pay and price-setting dynamics,' it said.

The report suggested that 'domestic inflationary persistence is expected to fade away over the next few years'.

'However, there is a risk that inflationary pressures from second-round effects will prove more enduring in the medium term,' the report said. 

'A stronger-than-expected path for demand, and structural factors such as a higher equilibrium rate of unemployment, could affect domestic wage and price-setting more persistently.' 

Financial markets had priced in a 65 per cent chance of a rates reduction - the first in more than four years. The Pound dropped against the US dollar and euro immediately after the news broke.

In June the MPC voted by seven to two to leave interest rates at 5.25 per cent, but gave a strong hint that it was moving towards a reduction. 

Mr Bailey said that despite reducing rates policymakers 'need to make sure inflation stays low, and be careful not to cut interest rates too quickly or by too much'.

He added: 'Ensuring low and stable inflation is the best thing we can do to support economic growth and the prosperity of the country.'

The base interest rate rose quickly from late 2021 to a peak of 5.25% last summer, before remaining there for 12 months.

Alpesh Paleja, interim deputy chief economist of the CBI business group, said: 'Today's decision to cut interest rates was on a knife-edge, as illustrated by the narrow majority of the Monetary Policy Committee voting in favour.

'At best, there is only mixed evidence that inflation persistence has been defeated.

'While the labour market is loosening and wage growth slowly easing, the unexpected strength in services inflation remains a red flag.

'We still think that today's meeting marks the start of a rate-cutting cycle, but the pace of this is now more uncertain.

'Several MPC members will be looking for more definitive signs of inflation persistence easing, to be swayed towards reducing rates further.'

The IMF warned recently that there is an increased prospect of 'higher-for-even-longer' interest rates due to persistent wage and services inflation.

Economists stressed that other key indicators of inflationary pressure – mainly services inflation and wage rises – have remained a concern for policymakers.

Ms Reeves took a huge political gamble earlier this week after claiming the Tories had left a £22billion black hole in the finances.

She used the accusation as cover to effectively tear up Labour's election platform - stripping winter fuel payments from 10million pensioners, ditching the long-awaited social care cap, and shelving major road projects.

Critics pointed out that nearly half of the alleged funding gap was down to Ms Reeves deciding to 'cave in' to union demands for public sector pay rises, with an eye-watering 22 per cent over two years for striking junior doctors and 5 per cent for many other workers.

Teachers and nurses are set to receive a 5.5 per cent pay boost, armed forces personnel will get a 6 per cent increase, prison service workers 5 per cent and the police 4.75 per cent.

That had raised concerns about pushing up other settlements, and adding to the CPI with a wage spiral.  

Bank of England FINALLY cuts interest rates to 5% - what it means for mortgages and savings 

The Bank of England has finally opted to cut the base rate from 5.25 per cent to 5 per cent.

It follows seven consecutive occasions in which the central bank voted to hold rates. Prior to that, there had been 14 consecutive base rate hikes since December 2021.

It was a close call, with five members of the Bank's Monetary Policy Committee voting to hold base rate, while four voted to lower it.  

We explain why the Bank of England has cut interest rate rises and what it means for your mortgage, savings and the wider economy.

Why has the bank cut rates?

Today's base rate decision was a harder one to call. Markets were divided over whether the cut would come today or in September.

The aim of increasing the base rate in the first place, and then holding it for the best part of a year, was to reduce the rate of inflation. 

Inflation peaked at 11.1 per cent in October 2022 and this has led to higher costs in many areas of household spending including energy bills and food shopping.

By raising the cost of borrowing for individuals and businesses, the Bank of England hoped to reduce demand, slowing the flow of new money into the economy.

More expensive mortgages and better savings rates encourage people to save more and spend less, further pushing down inflation.

The Bank of England will argue that the plan has worked with inflation remaining at 2 per cent in the 12 months to June.

Peter Stimson, head of product at the mortgage lender MPowered said: 'After months of nods, winks and speculation, the Bank of England has finally begun to ease its monetary policy squeeze.

'The primary reason for this is that consumer inflation is stabilising, and has been bang on the bank's 2 per cent target for two months in a row.

'But the second reason is that the bank's high interest rate policy – which makes mortgages more expensive and slows consumer spending – is holding back economic growth and the bank wants to remove the handbrake.'

What next for interest rates?

At present, markets are pricing in one further rate cut in 2024. If forecasts are correct, this could mean base rate will fall to 4.75 per cent by the end of 2024.

Looking further ahead, financial markets are forecasting base rate will fall to around 4 per cent by the end of next year before eventually settling at around 3.5 per cent.

Some economists are slightly more bullish. For example, Capital Economics is predicting base rate will fall to 3 per cent by the end of next year. 

Ruth Gregory, deputy chief economist at Capital Economics said: 'If we are right in thinking inflation will be weaker than the bank expects, then we still think rates will be cut to 3 per cent next year, rather than to 4 per cent as investors anticipate.'

> What's next for interest rates?  

What does this mean for mortgage borrowers?

In reality, the base rate cut serves as more of a symbolic moment for mortgage holders, rather than one that will make any meaningful difference.

This is because future base rate cuts are already largely baked into fixed rate mortgage pricing and means borrowers won't notice much difference when it comes to their mortgage rates - even with further base rate cuts down the line.

Robert Gardner, chief economist at Nationwide, said: 'Investors expect bank rate to be lowered modestly in the years ahead, which, if correct, will help to bring down borrowing costs. 

'However, the impact is likely to be fairly modest as the swap rates which underpin fixed-rate mortgage pricing already embody expectations that interest rates will decline in the years ahead.

'Affordability is likely to improve only gradually through a combination of wage growth outpacing house price growth, which is expected to remain fairly flat, with some support from modestly lower borrowing costs.'

The bulk of outstanding residential mortgages are fixed rate and for the vast majority of these people, the base rate change won't have any immediate impact.

The mortgage borrowers who stand to benefit the most are those on tracker and variable rates.

Variable rate mortgages include 'discount' rates and also standard variable rates (SVRs). Monthly payments on all these types of loan can go up or down.

Tracker rates follow the Bank of England's base rate plus a set percentage, for example base rate plus 0.75 per cent. They often come without early repayment charges, allowing people to switch whenever they like without incurring a penalty.

Standard variable rates are lenders' default rates that people tend to move on to if their fixed or other deal period ends and they do not remortgage on to a new deal.

These can be changed by lenders at any time, and will usually rise and fall when the base rate does - but they can go up or down by more or less than the Bank of England's move.

According to Moneyfacts, the average SVR is 8.16 per cent, up from an average of 4.4 per cent in December 2021 when base rate was just 0.1 per cent - but it will vary from lender to lender.

As for those on fixed rates, there are around 700,000 fixed-rate deals due to end in the second half of this year, according to UK Finance. 

Fixed mortgage rates have already been moving downwards in recent weeks, with the cheapest five-year fix dipping below 4 per cent for the first time since February.

Big lenders such as Nationwide, HSBC, Halifax and Barclays have been trying to undercut one another to compete for new customers. 

Despite the flurry of rate cuts, mortgage rates remain much higher than what most borrowers are used to. 

But rates are easing. This time last year, the average two-year and five-year fixed rates were 6.86 per cent and 6.35 per cent respectively.

The average two-year fixed mortgage rate is now 5.78 per cent, according to Moneyfacts, and the average five-year fix is 5.39 per cent.

Andrew Hagger, personal finance expert at MoneyComms said: 'A cut in interest rates will be a welcome relief to mortgage holders on a variable rate.

'For those currently on a fixed rate home loan, the financial benefit won't be felt immediately but it should make life a little less painful when they next come to review their fixed deal.

'People will be hoping this is the first of a series of cuts in the next 6-12 months, especially as inflation appears to be back under control.'

Nicholas Mendes, mortgage technical manager at broker John Charcol added: 'Today's bank rate reduction announcement is a positive step for the property and mortgage market, marking the first interest rate cut in over four years finally kick-starting the downward bank rate cycle. 

'Positivity spreads quickly and while today's rate cut would have already been priced in, this will undoubtedly revitalise activity. 

'Mortgage holders nearing the end of their fixed-rate period and prospective buyers can now make informed decisions with greater confidence, rather than delaying and speculating.'

> What's next for mortgage rates in 2024

What next for fixed rate mortgages?

Mortgage borrowers on fixed term deals should focus less on the base rate decision today, and more about where markets are forecasting the base rate to go in the future.

This is because banks change their fixed mortgage rates pre-emptively, on the back of predictions about where the base rate will ultimately be in the future.

This is why the cheapest mortgage rates are around 1 percentage point below the base rate.

Market interest rate expectations are reflected in swap rates. These swap rates are influenced by long-term market projections for the Bank of England base rate, as well as the wider economy, internal bank targets and competitor pricing.

As of 29 July, two-year swap rates are at 4.26 per cent. The same time last year, they were at 5.49 per cent. 

Five-year swaps are currently at 3.78 per cent, down from 4.75 per cent 12 months ago.

The lowest two-year and five-year fixed mortgage rates currently available are trending just above the equivalent swaps.

The lowest five-year fix is 3.99 per cent and the lowest two-year fix is 4.42 per cent. 

It is very rare for the lowest priced fixed mortgage rates to go below swap rates, though it did happen in January 2024 for a very short period of time.

Prior to the quick-fire base rate rises between December 2021 and August 2023, the lowest mortgage rates have trended above base rate. That was the case at least between 2008 and 2022.

This means that even if the base rate settles at between 3 per and 4 per cent, we should expect mortgage rates to be higher than that.

The view among market commentators is that rates are unlikely to change much - at least for now. 

Peter Stimson added: 'Provided inflation stays under control, the bank could reduce the base rate further later this year. 

'While most analysts are predicting that there could be two base rate reductions this year, there are no guarantees and no-one should expect rates to return to the very low levels we got used to in the 2010s.

'The other thing to remember is that today's base rate cut won't instantly translate into every mortgage lender cutting their interest rates.'

What does the base rate cut mean for savers?

The Bank of England's decision today to cut the base rate to 5 per cent marks the first time the bank of England has opted to cut the base rate since 2020.

It follows seven consecutive occasions in which the bank voted to hold rates at 5.25 per cent between August 2023 and June 2024.

Prior to that, there had been 14 consecutive base rate hikes since December 2021.

The Bank of England's successive interest rate rises between December 2021 and August 2023 were, by and large, good news for savers.

Savings rates have been falling even while the base rate was held at 5.25 per cent.

Previous headline-grabbing deals including Santander's 5.2 per cent special edition easy-access rate and NS&I's one-year bond paying 6.2 per cent, which launched in September 2023, have all but vanished.

Savings accounts across the board have taken a hit. The best one-year fixed-rate account on the market now pays 5.4 per cent, down from a high of 6.2 per cent in October 2023.

Savers should take some comfort that at least 1,638 savings accounts available still beat inflation which is now at the Bank of England's target of 2 per cent.

This is crucial because it means the value of your money is not falling in real terms.

Easy-access rates have fared slightly better and held steady, falling less sharply than their fixed-rate counterparts.

The best easy-access rate pays 5.04 per cent, down from a high of 5.2 per cent in January.

One area of the market to thrive over recent months has been cash Isas.

Savers rushed to pour a record £11.7billion into cash Isas in April, leading to the best start to an Isa season since the tax-friendly savings pots were launched in 1999. 

Savers have poured almost £20billion into cash Isas in the first three months of this tax year.

> Check the best savings rates using This is Money's independent best buy tables

Is it downhill from here for savings rates?

Experts foresee savings rates falling now that the Bank of England has cut the base rate.

One savings expert expects easy-access rates to be the worst hit with rates potentially falling in the coming weeks.

Andrew Hagger said: 'Easy-access rates will take the biggest hit from a base rate cut and if a September cut starts to look nailed on then we'll probably see some fall off in rates in the next few weeks.'

In August 2023, the average easy-access account paid less than 3 per cent, at 2.81 per cent according to Moneyfacts Compare.

Since the start of February 2024, the average easy-access rate has fallen from 3.17 per cent to 3.15 per cent.

In August 2023, the average easy-access cash Isa rate also stood at less than 3 per cent, paying 2.86 per cent

Since the start of February 2024, the average easy-access cash Isa rate rose from 3.3 per cent to 3.36 per cent.

James Blower, founder of Savings Guru said: 'What we are likely to see, with the base rate cut to 5 per cent, is one-year best buy rates falling to around 5 per cent in August and below that in September/October.

'Two year rates will drop below 5 per cent - likely to around 4.8 to 4.9 per cent in short order – and three year rates will ease back too.

'Easy-access rates will pull back with best buys likely to be around 4.75 per cent to 4.9 per cent in August. Easy-access Isa rates will ease back too – there's unlikely to be any rates over 5 per cent - and fixed Isa rates will pull back too.

'One year Isa rates have crept up with best buys around 4.95 per cent - but expect that to reverse with them coming down towards 4.75 per cent.'

Which banks offer the best savings rates?

When it comes to choosing an account, it's always worth keeping some money in an easy-access account to fall back on if life throws you a curveball.

Most personal finance experts believe that this should cover between three to six months' worth of basic living expenses.

The best easy-access deals, without any restrictions, pay just north of 5 per cent. If you're getting a lot less than this at the moment, you should seriously consider switching to a provider that pays more.

In terms of the best of the best, Oxbury Bank is now offering a market-leading easy-access deal paying 5.04 per cent.

It has a minimum deposit of £20,000. Someone putting £20,000 in this account could expect to earn £1,032 in interest over the course of a year.

> Find the best easy-access savings rates here

Those with extra cash which they won't immediately need over the next year or two should consider fixed-rate savings.

The best one-year deal is offered by Union Bank of India, paying 5.4 per cent.

Long gone are the days of one-year fixed-rate accounts paying 6 per cent or more, as was the case in October 2023 when NS&I was offering a 6.2 per cent one-year fix. 

NS&I revealed it will offer a new one-year Guaranteed Growth Bond paying 5.15 per cent or a Guaranteed Income Bond at 5.03 per cent.

The offer is exclusive to existing 6.2 per cent bond holders and will be available when their current one matures, starting from the end of next month.

A saver putting £10,000 in Union Bank of India's one-year fix will earn a guaranteed £554 interest over one year. It comes with full protection under the Financial Services Compensation Scheme up to £85,000 per person.

Other top one-year saving accounts are GB Bank which is paying 5.26 per cent, Access Bank is paying 5.25 per cent and Cynergy Bank is paying 5.16 per cent. All offer FSCS protection.

> Check out the best fixed-rate savings deals here

Savers should strongly consider using a cash Isa to protect the interest they earn from being taxed.

With interest rates higher and the personal savings allowance stuck at £1,000 for basic rate taxpayers and just £500 for higher rate taxpayers, it's become much easier to fall into the savings tax trap.

With a savings rate of 5 per cent, a basic rate taxpayer needs just £20,000 in cash now to breach the allowance, while a higher rate taxpayer needs £10,000.

Meanwhile, if you pay 45 per cent tax, you get no personal savings allowance at all.

Those wishing to keep their money in an easy-access cash Isa which they can dip in and out of can also get 5.1 per cent with Chip's flexible cash Isa.

The top one-year fixed-rate cash Isa is paying 4.89 per cent interest, while the top two-year fix is paying 4.67 per cent.