Back in February 2021, after months of Covid lockdowns, UK inflation stood at 0.4%, well below the Bank of England’s (BoE) 2% target.
Just a few months later, as pandemic restrictions lifted and consumers returned to the market, the Consumer Prices Index (CPI) soared. It peaked at 11.1% that October, marking a 41-year high.
The BoE’s Monetary Policy Committee (MPC) began to raise the interest rate in an attempt to curb rising inflation. From 0.1% in December 2021, it rose to 5.25% by August 2023. The rate has since remained unchanged for seven consecutive meetings.
According to the Guardian, financial markets now estimate that there is a 60% chance of an interest rate cut when the MPC next meet on 1 August 2024.
But how accurate is this prediction, and what – if anything – would a rate cut mean for you? Keep reading to find out.
Falling inflation suggests the rate will drop soon
The base rate is one of the main tools the BoE uses to keep inflation under control.
Simply put, a higher base rate makes borrowing more expensive and encourages saving. This is generally expected to reduce consumer spending, decreasing demand, and with it, prices.
The MPC meet eight times a year to set the base rate, with a target of using rises and falls to maintain inflation at 2%.
This proved particularly difficult in the wake of Covid.
Source: Office for National Statistics (ONS)
While the latest ONS figures confirm that inflation for the 12 months to June 2024 stood at exactly 2%, the MPC warns that it expects the CPI to rise again in the second half of this year.
It is this potential rise that makes second-guessing the MPC’s 1 August decision so difficult.
Whether the base rate drops in August or later in the year, the decrease is likely to be small. The BBC reports that the International Monetary Fund (IMF) expects UK interest rates to reach 3.5% by the end of 2025.
A high interest rate is good news for savers
Times have been tough for savers over the last decade or so but high interest rates have spelt good news over the last couple of years. While there can be delays between base rate rises and high street banks passing these onto customers, bank rates have improved.
After a post-Covid period in which cash savings were losing value in real terms thanks to high inflation, the minimal decrease to the base rate (if it occurs in August) won’t have an immediate impact on your savings.
As the rate falls, you might decide to check in with your savings to ensure your money is still in the best possible place. Moneyweek reported in January that around £380 billion of UK savings is currently languishing in accounts paying interest of 1% or less.
Investing could offer the chance of higher returns, albeit with additional risk. We can help you to think about your long-term investment goals, attitude to risk, and your capacity for loss, putting an investment strategy in place that works for you.
A drop in the base rate could lower your mortgage repayments
As we have already seen, increases in the base rate make borrowing more expensive. This is most apparent in the context of UK mortgages.
Rates soared following the September 2022 mini-budget, with products withdrawn from the market and average two-year mortgage rates topping 6%, the highest figure for 14 years.
The government English Housing Survey confirms that just under a third of households have a mortgage, with around 1.2 million people on tracker and standard variable rate (SVR) deals.
If this is you, you could see an immediate change in your payments if the base rate falls. More than 80% of UK homeowners, though, are on a fixed-rate deal. This means you will need to wait until your current deal ends to see a change in your payments.
Keep calm and carry on thinking long term
Whether or not the MPC votes to lower the base rate on 1 August, your long-term financial goals will likely remain unchanged. And that means your plan can stay the same too.
When it comes to your investments, ignoring the noise of global events is key. Elections, fluctuating inflation, and even global conflicts can all create uncertainty and lead to short-term stock market dips. Likewise, base rate changes will affect the interest you pay on your mortgage and other debt and might mean you need to revisit your household budget.
Over the long term, though, focusing on your end goals is key. At Globe IFA, we’re on hand to offer reassurance and keep you on track. If you have concerns, be sure to get in touch.
Get in touch
Please email hello@globeifa.co.uk or call us on 020 8891 0711 to discuss how Globe IFA’s expert financial advisors can help you manage your long-term financial plans.
Please note
This article is for general information only and does not constitute advice. The information is aimed at retail clients only.
The value of your investments (and any income from them) can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance. Investments should be considered over the longer term and should fit in with your overall attitude to risk and financial circumstances.
Your home may be repossessed if you do not keep up repayments on a mortgage or other loans secured on it.
