The Bank of England (BOE) has cut interest rates to four per cent, taking the cost of borrowing to the lowest level for more than two years.

The cut from 4.25 per cent is the fifth since August last year but was only narrowly backed by the BOE’s policymakers, who took two votes to reach a decision. Lower rates will reduce monthly mortgage costs for some homeowners but it could also mean smaller returns for savers.

The unprecedented second vote by policymakers suggests further interest rate cuts will be finely balanced amid concerns over rising prices, although BOE Governor Andrew Bailey told the BBC the path for rates continues to be “downwards”.

Inflation is now expected to peak at four per cent in September, the BOE declared in its monetary policy report. 

Rates at lowest level since March 2023

At four per cent, 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. People with tracker mortgages, which are loans that track the bank’s base rate, should see an immediate reduction in monthly repayments. 

There are about 600,000 people who have one. 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 many homeowners who are having to remortgage this year at rates higher than deals they struck several years ago.

Inflation higher than BOE expectation

That is twice the bank’s target rate and above the 3.8 per cent rate it predicted in its May report. However, while inflation is higher than the Central Bank would like, which would not normally lead to a rate cut, the economy has been struggling to grow, and there are fears about the job market.

Governor Bailey said the course of future rate cuts “is a bit more uncertain frankly” with the Bank reporting that global adverse weather conditions had also lifted the cost of goods such as beef, coffee beans and cocoa. However, companies told the BOE they expected UK labour costs “to continue to push up food prices in the second half of the year”, and in order to mitigate costs, they were having to cut staff.

They reported shoppers were “trading down” by purchasing own-label items as opposed to branded products, and buying “cheaper cuts of meat”. On the other hand, he said UK employment is “softening” with data showing job vacancies continuing to fall and wage growth slowing.

Split vote

The bank’s nine-member Monetary Policy Committee was split on the decision to cut rates. Four members wanted to cut rates, four wanted to hold and one – Alan Taylor – wanted a steeper reduction in borrowing costs. Some economists had been expecting a further interest rate cut at the bank’s meeting in November, but the tightness of the latest vote has led some analysts to cast doubt on whether this will happen.

“Bank of England policymakers are still playing a highly cautious hand,” explained Susannah Streeter, head of money and markets at Hargreaves Lansdown, saying “although the bank has opted for a cut, the chances of another reduction by the end of the year have receded sharply.” 

Ruth Gregory, deputy chief executive at Capital Economics, noted that the bank “appears in no rush to cut again”. She said the policymakers’ analysis of risks to the economy “raises the chances that the bank will skip a cut later this year”.

Chancellor Rachel Reeves said the drop was “welcome news, helping bring down the cost of mortgages and loans for families and businesses”.

However, shadow chancellor Mel Stride said interest rates “should be falling faster”, arguing, “rates are only coming down now to support the weak economy Rachel Reeves has created.” Liberal Democrat Treasury spokesperson, Daisy Cooper, said the cut “would have happened months ago if the government was not acting as a roadblock to growth”. 

The BOE now forecasts that GDP figures for the April-to-June quarter, due to be published next week, will show a sharp slowdown to just 0.1 per cent growth.