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Bank of England expected to cut interest rates UK interest rates cut to lowest level for more than two years
(about 4 hours later)
UK interest rates are widely expected to be cut on Thursday, taking the cost of borrowing to its lowest level for more than two years. The Bank of England has narrowly backed an interest rate cut in a knife-edge move after it had to vote twice to reach a decision.
Financial markets predict that the Bank of England will reduce interest rates to 4% from 4.25% in its fifth cut since last August, taking it to the lowest since March 2023. The cost of borrowing has been reduced from 4.25% to 4% in the fifth cut since last August.
A lower base rate can reduce monthly mortgage costs for some homeowners but it also means a smaller return for savers. But the Bank's unprecedented second vote suggests further interest rate cuts will be finely balanced amid concerns that inflation will spike as businesses raise food prices to pay for increased employment costs.
The Bank of England will also publish its forecasts for an economy that failed to grow in April and May - potentially creating a yawning spending gap which the government could choose to fill by announcing tax rises in the Autumn Budget. "Material increases" in National Insurance Contributions and the national living wage have added up to 2% to food prices, businesses told the Bank.
Next week, the Office for National Statistics will release data on how the UK economy performed between April and June. Inflation is now expected to peak at 4% in September, the Bank said in its Monetary Policy Report. That is twice the Bank's target rate and above the 3.8% spike it predicted in its May report.
It grew by 0.7% in the first three months of the year. Andrew Bailey, governor of the Bank of England, said the decision to cut interest rates was "finely balanced".
If the Bank does trim rates, repayments on an average standard variable rate mortgage of £250,000 over 25 years will fall by £40 per month, according to financial information company Moneyfacts. "Interest rates are still on a downward path," he said. "But any future rate cuts will need to be made gradually and carefully."
But for savers, the average return rate would fall from 3.9% in August last year to 3.5%, the financial data firm said. LIVE: Reaction to the Bank of England's decision
"Savings rates are getting worse and any base rate reductions will spell further misery for savers," said Rachel Springall, finance expert at Moneyfacts. While food prices have been affected by the government's decision to increase the minimum wage and National Insurance payments, the Bank said global adverse weather conditions had lifted the cost of goods such as beef, coffee beans and cocoa.
UK interest rates are expected to continue falling, though not at the same pace as the market has seen since last year. But companies told the Bank that they expected labour costs "to continue to push up food prices in the second half of the year".
"We are expecting more cuts," said Liz Martins, senior UK economist at HSBC. Businesses said that in order to mitigate costs, they were having to cut staff.
She told the BBC's Today programme she forecasts that borrowing costs will fall to 3% by the latter part of 2026. "But from today I do think the Bank of England will be a bit cautious," Ms Martins added. They also reported that shoppers were "trading down" by purchasing own-label items as opposed to branded products.
Customers are increasingly buying "cheaper cuts of meat" and purchasing food staples in larger value packs.
Inflation At 4%, interest rates are now at their lowest level since March 2023. This will boost some mortgage-holders and borrowers, but it is likely to mean smaller returns for savers.
Interest rates are expected to be cut despite inflation - which measures the pace of price rises - climbing above the Bank of England's 2% target. People with tracker mortgages, which are loans that rack the Bank's base rate, should see an immediate reduction on monthly repayments. There about 600,000 people who have one.
In the year to June, inflation rose to 3.6% due in part to the higher cost of food and clothing as well as air and rail travel. The latest cut in rates means repayments on an average standard variable rate mortgage of £250,000 over 25 years will fall by £40 per month, according to financial information company Moneyfacts.
However, there are signs that the UK employment market is cooling which could weigh on inflation. The Bank's rate-setters were split between four members who wanted to cut, four who wanted to hold and one who wanted a steeper reduction in borrowing costs.
Recent figures show that the number of people on payrolls is falling, vacancies are lower and the jobless rate has ticked higher. Looking ahead, the Bank lifted its forecast for economic growth in the short-term and said the impact of US tariffs on the UK was not expected to be as much as it thought back in May.
Meanwhile, annual growth in average regular earnings, excluding bonuses, slowed to 5% between March and May. However, tariffs are expected to dent economic growth to the tune of 0.2%.
Employers are facing higher costs, including an increase in National Insurance Contributions and the national minimum wage.
We will bring you live reporting from the Bank when we get the decision at 1200 along with expert analysis on what it means for you and your money.
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