A Bank of England rate reduction next week appears highly likely as the UK economy contracted for the second consecutive month, leading to concerns among households and businesses about potential tax increases in the upcoming Budget announcement by Chancellor Rachel Reeves. Data from the Office for National Statistics revealed a 0.1% decline in the economy in October, contrary to expectations of growth. This decline followed a similar contraction in September, marking a continuous period of economic stagnation or decline since June.
Experts had already anticipated a rate cut from the Bank of England’s current 4% base rate at the next Monetary Policy Committee meeting, but the recent economic data has reinforced this expectation. Neil Wilson from Saxo Markets confidently stated that a rate cut next week is inevitable, with predictions of further cuts in the future. Lindsay James from Quilter echoed this sentiment, indicating an increasing likelihood of a rate cut in the upcoming week.
Economist Philip Shaw from Investec Economics forecasted that Bank of England Governor Andrew Bailey would likely vote in favor of a base rate reduction at the forthcoming meeting, potentially leading to a narrow majority in favor of a cut.
TUC General Secretary Paul Nowak emphasized the need for the Bank of England to acknowledge the financial strain faced by families and businesses due to the living standards crisis, urging for additional interest rate cuts in the near future.
Impact on Borrowers:
A rate cut to an anticipated 3.75% would benefit mortgage and other borrowers, with lenders already engaging in a rate competition by reducing fixed-rate mortgage costs for new customers. Borrowers with variable rate mortgages stand to gain from a rate cut, particularly those on standard variable rates or discounted/tracker deals.
According to L&C Mortgages, an expected base rate reduction to 3.75% could lead to monthly savings of £16 for the average borrower with a £100,000 mortgage on a standard variable rate, with increased savings for higher loan amounts.
While fixed-rate mortgages do not directly align with the base rate, they are influenced by swap rates, indicating potential changes in costs set by lenders.
Impact on Savers:
Savers are advised to act promptly amid concerns of withdrawal of competitive deposit rates following a potential base rate cut by the Bank of England. Locking into fixed-term accounts now is recommended to secure favorable rates before any possible cuts take effect.
Experts suggest considering a diverse approach to savings, spreading funds across various account types for flexibility and stability. Reviewing ISA allowances is also advised, with the current £20,000 limit remaining in effect until changes announced in the Budget come into play.