"We expect this rate cut to act as a catalyst for what is already shaping up to be a buoyant market in 2025. "
- Ross Turrell, commercial director of CHL Mortgages
The Bank of England's Monetary Policy Committee has voted 7-2 to reduce Bank Rate from 4.75% to 4.5%. Two members preferred to reduce Bank Rate by 0.5% to 4.25%.
The reduction was widely expected following lower-than-expected inflation figures in December, with the market pricing in an 84% chance of a cut this week and two further cuts in 2025.
The MPC judged that there "has been substantial progress on disinflation over the past two years, as previous external shocks have receded". However, it predicts that higher global energy costs and regulated price changes will push up headline inflation to 3.7% by Q3 this year, even as underlying domestic inflationary pressures are expected to wane further.
While CPI inflation is expected to fall back to around the 2% target thereafter, the Committee says it "will pay close attention to any consequent signs of more lasting inflationary pressures".
As a result, the MPC says "a gradual and careful approach to the further withdrawal of monetary policy restraint is appropriate".
Despite welcoming lower rates, several industry experts raised concerns about how rising inflation and the threat of a US trade war could affect the future path of interest rates.
Jerry Mulle, UK managing director of Ohpen, said: “Today’s Bank of England base rate cut, to the lowest level in 18 months, should be welcome news for homeowners and prospective buyers. The move should signal easing inflation rates and in turn, lower mortgage rates. However, mortgage owners and applicants are not out of the woods.
“While interest rates have dropped, inflation is expected to rise again with changes in the upcoming Spring Budget in March, and uncertainty around how hard the UK economy could be hit by pending US tariffs from the new administration."
Nicholas Hyett, investment manager at Wealth Club, commented: “Recent economic data points to a slowdown in the UK economy – GDP came in lower than expected, inflation has fallen and unemployment has ticked up. The outlook is gloomy too, with many companies thought to be considering job cuts before a rise in the living wage and higher national insurance contributions in April.
Against that backdrop the Bank’s decision to cut rates is no surprise and was widely expected. Rate-setters, and the government, will be hoping a 0.25% cut provides the post January pick-me-up the economy needs – though some MPC members voted for a more radical reduction.
However, the real risks in the future are largely unknown. Will Trump’s trade war rock the global economy? Will the UK become a tariff target? How many jobs are at risk from rising labour costs? Will the Chancellor hike taxes again in the spring? With all those unknowable risks out there, this rate cut could be seen as much as a shot in the dark than a shot in the arm.”
Marie Grundy, managing director of residential mortgages and second charges at West One Loans, added: “The Monetary Policy Committee’s rate cut today signals a firm push to revive growth. Business sentiment has taken a hit since last October’s National Insurance hike, and economic performance is trailing behind government expectations. Add the threat of a US trade war into the mix, and the outlook is uncertain.
“Prioritising growth over inflation, the MPC’s move bodes well for the housing market. Markets are betting on between three and four more cuts this year, and a 3.75% rate by the year-end seems likely. If the economy continues to stagnate, the MPC may need to act more aggressively, but whilst also keeping inflation under wraps.
“For borrowers, news of further rate cuts will undoubtedly be welcomed. Whether fast or slow, they’ll likely be in a stronger position by year-end than they were at the start.”
Experts in the mortgage industry were more positive about how lower interest rates could stimulate the market this year.
Paresh Raja, CEO of Market Financial Solutions, said: "Today's decision was widely expected, and there’s been plenty of evidence of lenders changing their rates over recent weeks ahead of the base rate being cut. But it is another positive step nonetheless, and it will likely bring more buyers into the market.
"As ever, no sooner has the Bank of England delivered one decision than speculation begins about when it might cut the base rate again. The forecasts still suggest there could be anything between one and three further drops this year, but such predictions are sensitive to other trends, such as the performance of the economy and the rate of inflation. For now, the focus from lenders and brokers has to be on taking a pragmatic, responsive approach, ensuring they support borrowers as best they can, particularly if a wave of new prospective buyers and investors does enter the market."
Ross Turrell, commercial director of CHL Mortgages, commented: “The past few years have proven beyond doubt that the base rate set on Threadneedle Street has the greatest influence on the property market, so today’s decision - though widely expected - will be celebrated by the UK property sector.
“We expect this rate cut to act as a catalyst for what is already shaping up to be a buoyant market in 2025. Buyer demand and transaction levels are rising, and any reductions to the cost of borrowing will certainly sustain this momentum. With further rate cuts anticipated this year, it feels as though we are returning to a more stable and, dare I say, ‘normal’ investment landscape.
“With upcoming stamp duty reforms also on the horizon, February and March are set to be particularly busy months as buyers move quickly to complete on purchases before April's tax changes. It is therefore essential that lenders and brokers prepare for heightened market activity, ensuring their clients are in the best possible position to seize the opportunities this rate cut presents.”
