What does a base rate cut mean for your money?

The Bank of England (BoE) voted on 1 August to cut the base rate for the first time in over four years, after spending months at a 16-year high.

However, while such a cut has been predicted throughout 2024, the decision was still a close one. 

So, what does that mean for day-to-day finances when it comes to things like saving, borrowing, cost of living and house prices – and how might things change again in the future? 

Why has this cut happened now? 

The base rate has been set at 5.25% since August last year, partly in a bid to slow inflation, which hit 11% in October 2022. 

However, the CPI has dropped to, and stayed at, 2% (the BoE’s target for inflation) for May and June, suggesting things were starting to come under control. 

As such, the MPC decided to reduce the base rate, dropping it down 0.25% to 5%, the first cut since March 2020 (when it was at an all-time low of 0.1%) to start to ease pressures on households. 

A potential base rate cut has been predicted for a few months, but this decision was still close – the Committee voted 5-4 in favour of the reduction – with the outvoted four wanting to keep rates stable to further monitor the markets. As such, this shows there’s still a desire to act cautiously. 

What will happen to savings rates? 

Given over 55s hold the highest amount of cash savings in the UK and can use them to top up retirement income, any fluctuations to the interest rates they’re receiving could have a big effect on their overall financial health. 

"Savers holding money in variable or easy access accounts are likely to see the interest earned fall in the short term as banks react quickly to the Bank of England rate reduction,” says Alex Edmans, Product Director for Saga Money. 

“Those with a fixed rate account will continue to receive their rate of interest until the end of their current term, though on maturity they may find that the rates available for reinvestment are lower than they were receiving. 

“However, it’s still a good time to save – the base rate is significantly higher than the current rate of inflation, so there are still some great rates available, giving savers’ cash the ability to retain its real spending power and achieve returns above inflation.” 

She warns that while rates are currently strong, it’s important to shop around to understand what the best deals are and if you could be earning more elsewhere. 

"If all a person’s savings are just sitting with their high-street provider, it’s likely they’ll be able to get a better deal elsewhere – with rates falling, now’s the time for savers to look at moving their money into the better-performing accounts if they’ve not already done so.” 

What about mortgages? 

With the base rate coming down, another thing to consider is its effect on the cost of mortgages – as it drops, generally so does the interest rate for fixed-term deals. 

While over 55s are the most likely to own their home outright, there’s a growing number of people in their 50s buying their first home – in fact, it’s set to rise to 5% of all new homeowners by 2030. 

“The base rate cut should be better news for borrowers than for savers,” says Edmans. 

“Those on tracker mortgages are likely to benefit soonest with rate reductions swiftly following the Bank of England announcements.” 

Tracker mortgage borrowers will have their rates tied to a certain amount of percentage points above base, so the news of the cut will have an immediate impact on their finances.  

Anyone on a standard variable rate (SVR) mortgage, the rate people are moved to when their fixed-term deals end and they don’t remortgage, may also see a cut. 

“Those on SVR mortgages are also likely to see their monthly costs come down, though this is more at the discretion of the banks and, therefore, may take a little longer,” adds Edmans. 

Many banks have pledged to cut their SVR mortgages in the coming months, but for anyone on a fixed-term mortgage, they may still face higher costs when renewing their borrowing plan. 

“For anyone on a fixed-term deal, their existing terms will not change until the end of their current fixed period,” says Edmans. 

"But, despite the rate cut, interest rates are still significantly higher than when many took out their current mortgage deal and the impact of the 0.25% drop may be minimal.” 

However, it’s possible to fix in a deal ahead of time with some lenders. 

“Borrowers should remember they don’t need to wait until the absolute end of their fixed-rate deal to start to shop around,” says Edmans. 

“They can usually remortgage from six months before the end of their current term, so if they’re approaching the end of their fixed period, they can start looking for the best deal.  

“It’s likely that a new fixed rate will still give them better terms than an SVR, but they should remember it will tie them into that rate for a set period. 

"If someone is approaching the end of their fixed term – and doesn't want to recommit to another fixed deal in the hope that rates will reduce further – it's worth them looking at switching to a tracker rather than staying on the SVR of their current plan.

“However, tracker rates tend to be above or around the cheapest fixed deals on the market, so it's worth shopping around and thinking about whether a lower fixed rate for a couple of years would leave them better off.” 

If a borrower is considering which type to take out, or is worried about remortgaging costs, speaking to a mortgage adviser can help understand the market and options more easily. 

What about house prices? 

Cuts to the base rate can see positivity drip back into the housing market, giving people more confidence in future borrowing costs after months of high interest. 

“Over 50s are the highest group of homeowners in the UK, and the rate reduction may start to bring some confidence back to the housing market, potentially increasing property prices and the equity held,” says Edmans. 

If property prices start to rise once more – as they’re predicted to do in the coming months, albeit gradually – then this could also have an impact on estate planning.  

The Office for Budget Responsibility has highlighted increasing property prices as one of the reasons for the rise in Inheritance Tax (IHT), and if borrowing becomes cheaper and unlocks ‘pent-up demand’ in the housing market, more families may find themselves caught in the IHT net. 

For those worried about an increasing IHT bill, there are steps that can be taken to mitigate it over time – but it’s a complicated issue, so consulting a professional financial planner could well help understand the best options for their situation. 

What might happen to the base rate in the future? 

It’s impossible to accurately predict what’s going to happen to the base rate in the coming months and years, partly because it’s hard to know what will happen to inflation. 

However, unforeseen global events can also shock markets and cause prices to rise – as seen with the cost of energy shooting upwards after the Russian invasion of Ukraine. 

When announcing the August base rate cut, Andrew Bailey, Governor of the BoE and Chair of the MPC, sounded a cautious note. He suggested any future cuts will be slow and steady to allow time to assess the impact of current actions on inflation. 

“Inflation has been exactly on our 2% target for two consecutive months. And inflationary pressures in the UK economy have eased much as expected. This is very welcome news,” said Bailey. 

“At the same time, the UK economy has been stronger in recent months. This is very welcome. But it adds to the risk that inflation could be higher than expected if we cut interest rates too much or too quickly. Despite easing, services price inflation and domestic inflationary pressures remain elevated.” 

As Bailey noted, services inflation – which includes things like education and hospitality – was still higher than expected, and as such the MPC says it “remains cautious” around future rate cuts. 

The expectation is that inflation will rise slightly from 2% to 2.75% by the end of the year but is projected to settle around 1.5-2% in three years' time, providing things move as expected in the economy. 

“Given the expectation that inflation is unlikely to stay at 2% due to anticipated increases to the energy price cap, it is unlikely that we are about to enter a pattern of frequent interest rate drops and another period of extremely low rates in the near term,” says Edmans. 

“It’s more likely that rates might come down once, at the most twice, across the remainder of the year, with a few more rate reductions likely in 2024.” 

The Bank of England is predicting the base rate will settle to around 3.5% towards the end of 2027 – however, these forecasts will be continually revised based on market conditions (the ‘market-implied path’) and depend on things like wage growth, unemployment and inflation stability.