The recent interest rate cut by the Bank of England, the first since the start of the COVID-19 pandemic, has been received as good news by many. However, experts are warning that the road back to more comfortable borrowing costs will be challenging. The Bank of England raised the Bank rate 14 consecutive times from December 2021 in an effort to control the surge in inflation. This inflation was initially due to the COVID recovery but was further accelerated by Russia’s invasion of Ukraine.
The rate cut, from 5.25% to 5%, may benefit hundreds of thousands of households with tracker or floating mortgage products. These mortgages are directly linked to the Bank rate and will see a decrease in their monthly payments. Lenders may choose to pass on this reduction to Standard Variable Rate (SVR) mortgage customers, though they are not obligated to do so. This cut may also benefit those looking to secure new fixed-rate deals in the near future.
While there are clear winners from the rate cut, there may be some losers as well. Not all SVR mortgage customers may benefit from the reduction immediately. Furthermore, savers might see cuts in their interest rates by banks and building societies in response to the rate cut. Those locked into a new fixed-rate mortgage deal may not benefit from the rate cut until their term expires.
For households with existing mortgages, the impact of the rate cut will depend on when they secured their mortgage deals. Many households have seen a significant increase in their monthly repayments since the first rise in the Bank rate in December 2021. Families on SVRs, in particular, have experienced a substantial increase in their mortgage payments.
The rate cut is unlikely to have an immediate impact on private rental agreements unless landlords take out new loans. Therefore, renters may not see an immediate benefit from the interest rate reduction.
The rate cut signifies a loosening of the Bank’s control on economic activity, but its impact may be limited to sentiment. There is a concern that increased spending by consumers and businesses following the rate cut could lead to inflation. The housing market, in particular, has been affected by high interest rates, and the rate cut may boost home-mover sentiment.
Overall, while the interest rate cut by the Bank of England is a positive development for borrowers and the economy, it may not result in significant relief in the short term. Consumers and businesses should approach the rate cut cautiously and consider the potential long-term ramifications of increased spending and borrowing.
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