The Bank of England cut interest rates from 4.75% to 4.5%.

Rates cut to 4.5% and reach their lowest point since June 2023

• The Bank of England cut interest rates from 4.75% to 4.5%.
• What this means for the markets, savings, annuities and mortgages.

Susannah Streeter, head of money and markets, Hargreaves Lansdown:

“The Bank’s decision has added to the feel-good factor for the Footsie, with investors reassured that policymakers stuck to the expect script and cut interest rates with more expected this year. The index surged to fresh record highs, as the falling pound buoyed multinationals with overseas earnings.

A sigh of relief is greeting this rate cut given how long painful borrowing costs have lingered, but the move and the outlook from the Bank underlines the challenges facing the UK.

The risks of stagflation are stark. Inflation remains above the Bank’s 2% target and price pressures piling up, but the economy is stagnating, and business confidence has taken a knock.

The vote was resoundingly for a cut, with two members wanting to go even further pushing for a 0.5% reduction. This has increased expectations that further rate cuts will come more quickly this year with markets now pricing in the likelihood that the base rate will be close to 3.75% by December, indicating three further reductions. That’s been reflected in the movement of the sterling, which has continued to fall back against the dollar.

The Bank has slashed its forecast for growth this year, which keeps the door wide open for multiple rate cuts to come. Other data out this week shows that job cuts are landed at the steepest pace in four years in the services sector and the activity in the construction sector contracted unexpectedly in January for the first time in a year.

Given the deteriorating economic picture, financial markets are now expecting at least two maybe three further interest rate cuts this year, with the base rate likely to drop below 4% by 2025. The speed will depend on how the economy responds in the months to come. Businesses are already feeling the pain of upcoming changes to National Insurance contributions, as with suppliers starting to pass on the costs of higher expected wage bills.

How all this will land in terms of consumer prices and demand for goods and services in the economy is not yet clear. The threat of Trump’s tariffs also clouds the picture. A knock to global trade could stymie growth further, and although the dominance of services in US exports should offer insulation, and the UK could even potentially benefit as trade flows shift and investors seek safer tariff-free havens. So, while there still may be a pause for thought in March, with further cuts looking more likely once summer arrives.’’

What it means for annuities

Helen Morrissey, head of retirement analysis, Hargreaves Lansdown:

“The fortunes of the annuity market have been transformed in recent years with incomes hovering just below all-time highs. The latest data from the HL annuity search engine shows a 65-year-old with a £100,000 pension can get up to £7,492 per year from a single life level annuity with a five-year guarantee. Today’s interest rate cut will likely do little to dampen demand with annuities expected to deliver great value to retirees for some time yet.

Once you’ve bought an annuity it can’t be unwound so it’s vital you do your homework before you commit. Using an annuity search engine to look across the market is a great way of making sure you get the best deal and disclosing your health details can also give you an extra income bump. If you are worried about tying yourself into an annuity rate now, it’s important to remember you don’t need to commit all of your pension at once. Instead, you can annuitise in stages throughout retirement – securing guaranteed income as your needs change. As you get older you can secure higher annuity rates and if you develop any health conditions you can opt for an enhanced annuity with a bigger income. Adopting a mix and match approach with drawdown can give you a great mix of flexibility and certainty.”

What it means for your savings

Sarah Coles, head of personal finance, Hargreaves Lansdown:

“This rate cut was all-but nailed on. The savings market hadn’t just counted its chickens, it had roasted and sold them – pricing the rate cut firmly into fixed rate deals. It means the fixed term market is unlikely to move far for now.

Meanwhile, for those banks that gamely held onto easy access rates well above 4.5%, this could be the catalyst for some cuts. It could blow some of the froth off the easy access cash ISA market too, which has been incredibly competitive recently, with plenty of banks offering more on easy access cash ISAs then their equivalent savings accounts. We could see the number of deals over 5% pull back, despite the fact that we’re heading firmly into the traditional ISA season.

More falls for fixed rates will come, once the market is convinced that more cuts are on the way. At the moment, it looks like this is some way off, especially with tariff dramas fuelling unease over inflation. At times like this, it’s easy to be bamboozled to a full stop, unsure as to whether rates will rise again before they fall. However, it if you hang on, in the interim you could be missing out on some rewarding deals – especially over slightly longer periods. Rather than waiting for the best possible moment to fix, it makes sense to take advantage of the best deals while they last”

What it means for mortgages

“It’s a rare good day for anyone on a tracker mortgage, who will see their monthly bills finally drop. If they opted for a tracker 18 months ago in the hope that rates were on their way down, the three-quarter point cuts we’ve had in that time won’t feel anything like rewarding enough. However, by this stage they’ll be prepared to take whatever they can get.

For those looking for a new fixed rate, it’s not going to move the dial significantly overnight, because the market had already largely priced this in. Right now, Moneyfacts data shows the average 2-year fixed rate mortgage has inched up from 5.48% at the start of the year to 5.52%. It may inch down again in the coming days, but it’s not going to bring a wave of relief for anyone set to remortgage in the coming weeks and months.

The latest HL Savings & Resilience Barometer shows that those who have had to remortgage since the end of 2022 pay an average of £158 a month more than those who haven’t yet had to press the button. The fact that rates aren’t coming down in a hurry means there’s more pain lying in wait for anyone looking for a new deal right now.”

Kindly shared by  HL  Picture courtesy of Adobe