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Interest rates: Cut expected by the Bank of England UK interest rates cut to 4.25% by Bank of England
(about 4 hours later)
Interest rates are widely expected to be cut on Thursday, with further falls predicted for later in the year. Interest rates have been cut to the lowest level in about two years after the Bank of England reduced them to 4.25% from 4.5%.
Analysts say a cut to 4.25% from 4.5% by the Bank of England is highly likely, although no change or a bigger reduction remain possibilities. Bank governor Andrew Bailey said the slowdown in inflation was behind the decision to cut, but warned recent weeks had shown "how unpredictable the global economy can be" following the introduction of wide-ranging US tariffs.
Such a move would make borrowing money by businesses and individuals less expensive, but there are likely to be lower returns for savers. The Bank's rate-setting committee was divided - five members voted to cut rates to 4.25%, two voted in favour of a larger reduction to 4% and two voted for no change.
The announcement will come at 12:02 BST, following a two-minute silence to mark VE Day. The decision comes as the details are set to be announced over a tariff deal between the UK and US later on Thursday.
If a cut is confirmed, it would be the fourth rate reduction from last year's peak of 5.25%, and the second this year. Currently, most goods imported from the UK to the US face a blanket 10% tariff, with higher import taxes on steel and cars.
Balancing act The Bank said uncertainty surrounding the future of global trade had "intensified" as a result of tariffs, but added that regardless of whether or not a pact was struck with the US to avoid them, "the negative impacts on UK growth and inflation are likely to be smaller".
Members of the Bank's Monetary Policy Committee (MPC) will be paying close attention to the rate of price rises in the UK, as measured by inflation. It said that the impact of tariffs on the UK was likely to be a slowdown in price rises rather than an increase, as countries hit hard by US import taxes, such as China, look to establish new trade routes.
Interest rates are the Bank's primary tool in ensuring the annual rate of inflation remains at, or close to, the target of 2%. The latest UK inflation figures shows prices rose 2.6% in the year to March, although a series of household bill increases at the start of April – including energy and water prices – mean the rate is expected to climb higher.
The latest data shows an inflation rate of 2.6% in the 12 months to March, although a series of bill increases at the start of April - including domestic energy prices - mean the rate is expected to climb, perhaps only temporarily. The Bank said it expected inflation to rise "temporarily" to 3.5% this year due to the bill increases before falling back, with lower oil and gas prices set to feed through in the coming months.
The committee will also be alert to wider global economic uncertainty. President Trump's tariff policy in the US was unveiled after the MPC's last meeting in March. Employers were also hit with a rise in National Insurance last month, but the Bank said the effect of the tax increase "appears to have been fairly small to date", though it added business confidence had taken a hit in recent months.
Many analysts say inconsistency and uncertainty regarding the policy may push down growth and inflation, leading to expectations of the MPC responding with more interest rate cuts this year. Mr Bailey said "ensuring low and stable inflation" was the Bank's top priority, adding it needed to "stick to a gradual and careful approach to further rate cuts".
How a cut would affect you The cut in rates to 4.25% marks the fourth reduction from last year's peak of 5.25%, and the second so far this year.
The likelihood of an immediate cut, with more to come, has been reflected in the markets and, in turn, on mortgage pricing. Interest rates are the Bank's main tool in try to maintain the annual rate of inflation at, or close to, its target of 2%.
Eight in 10 homeowners with a mortgage have a fixed-rate deal and will pay close attention to the interest on new deals when they first buy or when they shop around ahead of a current deal expiring. The influential International Monetary Fund has predicted that the Bank could cut rates two more times this year,
Lenders have been cutting the mortgage rates on these new fixed deals in recent weeks, although not down to the levels seen during most of the 2010s. Given that lenders have already "priced in" a cut in interest rates, further falls in mortgage rates are not guaranteed. The Bank's base interest rate dictates the rates set by High Street banks and lenders. The higher level in recent years has meant people are paying more to borrow money for things like mortgages and credit cards, but savers have also received better returns.
The average two-year fixed mortgage rate is 5.15%, according to financial information company Moneyfacts, and a five-year deal is 5.08%. About 600,000 homeowners have a mortgage that tracks the Bank's rate, so rates being cut will have an impact on monthly repayments.
Samren Reddy is saving to buy a first home More than eight in 10 customers have fixed-rate deals, but could continue to face higher repayment costs when renewing.
Samren Reddy, a medical student at the University of Liverpool who got in touch with Your Voice, Your BBC News, is saving to buy a first home. Mortgage rates have been edging down recently, primarily because the markets and lenders expect further rate cuts this year.
"I don't think a small decrease will be a game changer. We're saving for the initial upfront deposit," the 21-year-old said. The theory behind increasing interest rates to tackle inflation is that by making borrowing more expensive, more people will cut back on spending and that leads to demand for goods falling and price rises easing. But it is a balancing act as high interest rates can harm the economy as businesses hold off on investing in production and jobs.
"If I'm trying to save for a home, alongside my day-to-day living, even if I may be paying less on a loan and could get a cheaper mortgage, it's swallowed up by the pressures of living." However, the Bank has forecast UK growth for the first three months of this year to be stronger than expected at 0.6%. The official figures are set to be released next week.
A fall in interest rates are also likely have an impact on the returns people like Samren receive on their savings. A boost in growth would be welcome news to the government, which has made growing the economy its main priority in order to boost living standards.
Base rate cuts generally lead to reductions in the interest provided by savings providers, particularly on instant-access accounts. Earlier this year the Bank halved its growth forecast for the UK to 0.75%, down from its previous estimate of 1.5%.
Anna Bowes, savings expert at financial advice firm The Private Office, said it was "encouraging" that fixed savings rates were still competitive, with relatively high interest paid. The theory behind increasing interest rates to tackle inflation is that by making borrowing more expensive, more people will cut back on spending and that leads to demand for goods falling and price rises easing. But it is a balancing act as high interest rates can harm the economy as businesses hold off on investing in production and jobs.
However, she said that required people being willing to lock their savings into an account and to leave them untouched for the term of the deal, generally between one and five years. However, the Bank has forecast UK growth for the first three months of this year to be stronger than expected at 0.6%. The official figures are set to be released next week.
Vanda has a tracker mortgage A boost in growth would be welcome news to the government, which has made growing the economy its main priority in order to boost living standards.
A rate cut would guarantee some mortgage-holders lower monthly repayments. Earlier this year, the Bank halved its growth forecast for the UK for this year to 0.75%, down from its previous estimate of 1.5%.
Nearly 600,000 homeowners have a mortgage that "tracks" the Bank of England's rate, so a base rate change would have an immediate impact.
A typical tracker mortgage-holder is likely to see about £29 knocked off their monthly repayments if the Bank rate is reduced by 0.25 percentage points, according to calculations by banking trade body UK Finance.
Homeowner Vanda, who has a tracker, told the BBC: "I had a really good rate, then all of a sudden it changed and I got caught out.
"A drop would help because I've just been made redundant, so that would help a wee bit. I don't think it will ever go back to the way it was, though."
Those on standard variable rate mortgages will need to wait for the lender to decide on any changes to the home loan rate if the Bank's base rate changes.
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