August saw the gift that UK consumers and house buyers had been waiting for during much of 2024 – the first cut in the Bank of England base rate in four years. It had the immediate effect of stimulating housing demand as mortgage rates began to fall in response.
The base rate had been rising since December 2021, hitting a 16-year high of 5.25% in August 2023. At the end of July, the Monetary Policy Committee saw a narrow margin vote of 5 to 4 to reduce the bank rate by 0.25 percentage points to 5%. The base rate had previously been held at 5.25% for almost 12 months.
The 5% base rate was maintained for a second month in September’s announcement from the MPC, this time with a higher majority of those in favour at 8-1 and only one committee member proposing a further 0.25 percentage points cut.
A November cut on the horizon
Further cuts this year have long been mooted but the Bank of England’s governor Andrew Bailey has stressed that cuts wouldn’t happen too quickly or be too deep. With September’s rate remaining static it’s anticipated that the next base rate announcement, scheduled for 7 November, will see a further 0.25 percentage points cut, taking the base rate to 4.75% and a welcome Christmas present for house buyers.
However, this announcement will come just a week after the Budget which Chancellor Rachel Reeves has already revealed will be “painful” with taxes expected to rise. While many are hoping for measures to stimulate the housing market there are worries that, as the government attempts to plugs its £22 billion fiscal ‘black hole’, more hardship for consumers could be imminent. That could dampen enthusiasm to buy, as well as impacting affordability.
Inflation meanwhile remains at 2.2%, shy of the 2% target achieved earlier this year in May and June. It is expected to rise again before the end of 2024 as energy prices increase although it’s predicted to settle again in early 2025.
Some economists believe that as well as a November cut a further Christmas boost could come with expectations of a third 2024 cut at the last MPC meeting of the year on 19 December. However, Bailey’s earlier warning of a cautious approach to cuts means it’s likely to be 2025 before we witness further cuts.
2025 will be interesting to watch. In May, the International Monetary Fund recommended that UK interest rates should be cut to 3.5% by the end of 2025. Research by Capital Economics puts the figure at 4%.
Whatever happens, lenders have started responding, with continued cuts in mortgage rates and sub-4% fixed deals. Further base rate cuts could push mortgage rates down further. As interest rates fall, living costs will also ease, leading to hopes of improvements in affordability and potential buyers better able to save for the deposits that will get them moving at last.
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