Interest rates fall below 5%

Interest rates have dipped below 5% for the first time since May 2023.

The Bank of England (BoE) has cut the base rate by 0.25% for the second time this year, meaning interest rates are now at 4.75% – down from a 16-year high of 5.25%.

The cut comes after inflation fell below the BoE’s 2% target in September for the first time in over three years.

Today’s reduction was widely predicted by economists, after governor of the BoE Andrew Bailey said in September: “Interest rate are now gradually on the path down.”

Speaking on Thursday (7 November), Bailey said it's "likely that interest rates will continue to fall gradually from here", although "we need to make sure inflation stays close to target, so we can't cut interest rates too quickly or by too much."

But interest rates remain higher than before they started to rise in 2021, with many experts warning they’re unlikely to ever return to the ultra-low levels seen in the decade after the global financial crisis.

This is because the economic backdrop has shifted significantly since then.

Any excitement around today’s interest rate cut has been overshadowed by last week’s budget which is expected to have a negative impact on inflation and ultimately interest rates over the next few years.

Bond markets – the marketplace for debt securities – reacted badly the day after the budget because of the new government’s pledge to borrow more to fund growth.

Because of this, gilts – which are essentially loans to the government – increased sharply, making it more expensive for our government to borrow.

But what does this mean for me?

Mortgage rates have fallen from their peak last summer and reduced further after the BoE’s last base rate cut on 1 August.

But economists now predict the Bank will be less aggressive in cutting rates throughout 2025 than previously expected and inflation could stay ‘hotter’ for longer.

This means the cost of living will remain an issue well into next year, with prices for essential goods unlikely to fall.

It will also come as a blow to homeowners hoping for significant mortgage payment reductions over the next 12 months.

And this will mean a sharp rise in monthly payments for the tens of thousands of those coming off fixed rate deals in 2025, some of which are sub 2%.

For those struggling to stay on top of their mortgage payments, there is help available.

The first thing you should do is contact your lender and explain your situation. Lenders must treat you fairly and work with you to find a solution, such as lengthening the term of your mortgage, switching to interest-only payments or offering a payment holiday, as set out in the Mortgage Charter.

And if you’ve fallen behind with other priority payments, get in touch – there are lots of ways we can help.

What is the Bank of England interest rate?

The BoE interest rate, often referred to as the bank rate or base rate, is essentially the cost at which the UK’s central bank lends money to commercial banks.

This rate impacts borrowing costs for loans, like mortgages and credit cards, as well as the returns on your savings.

It’s set eight times a year by the Monetary Policy Committee.

How are inflation and interest rates linked?

Central banks, like the Bank of England, change interest rates to bring inflation under control.

When inflation rises too quickly, they might increase interest rates to cool things down. This makes borrowing more expensive, which can lower spending and slow down price increases.

On the flip side, if inflation is low, central banks may drop interest rates. This encourages borrowing and spending, which can help boost the economy.