Bank of England tipped to cut interest rate to lowest level since 2023 in boost for mortgage holders

 The Bank of England is expected to cut interest rates to four per cent on Thursday, according to City economists.

If this happens, it would be the first time since March 2023 that the base rate has dropped to this level.

The current rate is 4.25 per cent and affects everything from mortgage payments to savings returns.

Rates hit a peak of 5.25 per cent in August last year as the Bank tried to bring down high inflation. Since then, they have been cut four times, including twice this year.

This latest expected cut comes as the jobs market shows signs of weakness. Unemployment rose to 4.7 per cent in July, the highest since 2021.

However, consensus amongst the nine-member committee appears unlikely, with forecasters anticipating a three-way division in Thursday's vote.

Thomas Pugh, chief economist at RSM UK, suggested that five members would support the quarter-point reduction, whilst two committee members might push for a more aggressive half-point decrease. Two others could favour maintaining the current rate.

"The committee is likely to stick to its gradual and cautious guidance, but the vote will probably be split three ways this time," Pugh stated.

Market observers are particularly focused on Catherine Mann's position, given her previous opposition to May's rate reduction when borrowing costs dropped to 4.25 per cent.

Chief economist Huw Pill is anticipated to advocate keeping rates unchanged, whilst Swati Dhingra and Alan Taylor are expected to support a larger reduction.

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The Bank of England has hinted to further interest rate cuts

The Bank of England is dealing with mixed economic signals as inflation and the job market are pointing in different directions.

Prices rose by 3.6 per cent in the year to June, which was higher than expected and well above the Bank's two per cent target. Services inflation, which includes things like transport and hospitality, is still high at 4.7 per cent which is a key worry for the Bank.

James Smith, a UK economist at ING, said the Bank was in an "uncomfortable" position. He warned that if services inflation stays this high, it could become a long-term problem."

Officials are concerned that when inflation reaches these levels, it is more likely to become embedded," Smith explained.

The deteriorating employment situation adds another layer of complexity, as reduced consumer spending power typically eases inflationary pressures.

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Policymakers are facing a tough balancing act as prices keep rising but the job market weakens

Policymakers are facing a tough balancing act as prices keep rising but the job market weakens. Looking ahead, the direction of interest rates is far from certain as Economists are split on whether the Bank will cut rates again before the end of the year.

Pantheon Macroeconomics suggested Thursday's expected reduction could mark the conclusion of the current easing cycle, projecting no further decreases through 2025 or 2026.

Deutsche Bank Research takes a contrasting stance, forecasting reductions in November, December and February that would bring the base rate down to 3.25 per cent.

Market pricing indicates expectations of rates settling near 3.5 per cent. Smith warned that policymakers appeared "reluctant to entertain the possibility of faster rate cuts" given the economic crosscurrents.

He added that meaningful improvement in services inflation would likely require waiting until spring 2026, when many prices undergo annual adjustments.

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There are many mortgage deals on the market

The current average two-year fixed mortgage rate is currently level with the average five-year rate, with both at 4.52 per cent, according to the latest figures from Rightmove. And, according to the company’s mortgage expert Matt Smith, the rate is set to come down further if the Bank of England goes ahead with an expected cut of 0.25 per cent.

Smith said: "Over the last week, average mortgage rates have remained pretty flat in the build up to next week’s interest rate decision. Expectations are currently set on a cut next week, and I expect lenders will use this moment as an opportunity to reduce mortgage rates a little further.

"Rate drops have been very slow and steady this year, but someone looking to take out a mortgage right now is likely to see a notable reduction in the rate they’d have been offered this time last year, particularly someone looking to fix for two years. With average two-year and average five-year fixed currently level, it would appear to only be a matter of time before the typical two-year rate is cheaper than the five-year equivalent.”

But Sarah Coles, head of personal finance at Hargreaves Lansdown, said the reductions may not last. She commented: "Fixed rates had bumped up slightly in the recent past, so in the last couple of days some banks have been cutting them in anticipation of a Bank of England rate cut. Assuming the rate is cut next week, we could see some competitive deals emerge after the announcement.

"However, further out, we may see cuts slow in the coming weeks. This is partly because expectations haven’t changed as much recently and are increasingly priced in. It’s also because lenders don’t want to go too far or too fast, or people who have already agreed a rate in advance will abandon it in favour of a cheaper one."