Bank Of England Holds Interest Rate At 4%.

Many expected the Bank of England to keep the interest rate at 4%, and they were right. Inflation stood at 3.8% in September as per official data, and this was lower than expected, but still above the 2% target.

The last change came in August when the Monetary Policy Committee reduced the rate from 4.25% to 4%. Before that, it had been held at 4.25% since May. Historical data shows a gradual downward pattern since August 2023 when rates peaked at 5.25%.

But the announcement might come as a surprise for some. Goldman Sachs expected the Bank to cut the base rate to 3.75%, saying the latest inflation data makes a reduction more likely. In contrast, Deutsche Bank expected a hold, although it described the call as “finely balanced.” Both banks agreed that the decision is likely to be close as policymakers weighed up inflation pressures against slowing growth.

Bank governor Andrew Bailey recently noted that unemployment had reached 4.8%, which some see as a sign that the economy is losing strength. Inflation is expected to cool further, but Bank forecasts do not see it reaching 2% until mid-2027.

What Divided The Monetary Policy Committee?

The MPC has become increasingly split in recent months, which is why there was so much uncertainty around today’s announcement. Sanjay Raja, chief UK economist at Deutsche Bank, said there are three clear groups within the committee: hawks, centrists and doves.

Hawks believe changes in the labour market could make inflation stickier, while centrists are cautious about economic weakness. Doves think inflation is easing and want faster rate cuts. At the September meeting, two members, Swati Dhingra and Alan Taylor, voted for cuts, but the majority chose to hold rates.

Growth has held up better than expected this year. GDP grew by 0.7% in the first quarter and 0.3% in the second. August recorded a 0.1% monthly rise after a fall in July. Services activity showed no monthly growth, while construction output went down 0.3%. Production rose 0.4%. These mixed figures likely gave both sides of the MPC arguments to defend their views.

Goldman Sachs said the case for a rate cut had strengthened due to “a dovish round of data.” Deutsche Bank added that the centrists would likely want to see inflation expectations fall further and wage growth drop closer to 3% before easing monetary policy again. However, it seems like the committee voted to keep rates as they are, especially with the looming budget later this month.

How Do Rate Cuts Affect Mortgages?

Falling interest rates generally make mortgages cheaper. According to Moneyfacts, the average 2 year fixed rate mortgage stands at 4.96% and the average 5 year rate is 5.02%. These are much lower than August 2023, when the average 2 year rate reached 6.85% and the 5 year rate was 6.37%.

For a borrower with £400,000 over 25 years, a fall in average mortgage rates from 6.85% to 4.96% would mean about £459 less in monthly repayments, based on MoneyHelper’s calculator.

UK Finance said around 1.6 million fixed rate mortgage deals will end in 2025. Those coming off expensive 2 year deals could benefit from lower rates, while borrowers leaving older, cheaper 5 year deals will face higher repayments when they refinance. For many, the news that the rate is staying the same will be far from ideal.

What About Savings And Pensions?

Savings rates have already started to edge down as expectations of rate cuts grow. Moneyfacts data shows the average savings rate fell from 3.46% in September to 3.44% in October, its lowest level in over two years. Most easy access and fixed savings accounts now pay below 4%. Only around one in four pays more than that.

Adam French, head of news at Moneyfacts, said savers should shop around to get the best returns, as “money left sitting in low-paying accounts is losing value in real terms.”

LHV Bank currently leads the 1 year fixed-rate market with 4.46% interest on deposits of at least £1,000. For those who can afford to lock in their cash, fixing could be a sensible way to secure higher rates before they fall further.

In the pension market, high interest rates have supported strong annuity incomes. Hargreaves Lansdown data shows a 65 year old with £100,000 can earn up to £7,793 a year from a single-life annuity with a 5 year guarantee. Helen Morrissey from the company said September’s rate hold was “good news for those on the hunt for an annuity,” as slower rate cuts could help keep incomes high.

For now, the Bank of England has chosen to hold rates at 4%. Whilst this might control prices, it will also keep pressure on households with mortgages and loans. Will it help the UK curb inflation? We will wait and see.