Bank of England holds rates at 5.25% AGAIN

• Base rate has been at its current level of 5.25% since August 2023 
• Markets now forecast it will fall twice before the end of the year 
• We ask experts what the latest pause means for your mortgages and savings 

The Bank of England has opted once again to hold the base rate at 5.25 per cent.

The decision marks its sixth pause in a row, after the Monetary Policy Committee voted to hold the base rate first in September 2023.

Prior to that, there had been 14 consecutive base rate hikes since December 2021. Seven MPC members voted hold, while two voted for cuts. 

We explain why the Bank of England has paused interest rate rises and what it means for your mortgage, savings and the wider economy.

Why has the bank paused rate rises?

Today’s base rate decision was widely expected, although it is predicted the Bank of England will cut base rate twice before the end of the year, with the first potentially coming as early as next month.

If forecasts are correct, this could mean base rate will fall from 5.25 per cent to 4.75 by the end of 2024.

The aim of increasing the base rate in the first place was to reduce the rate of inflation, which has led to higher costs in many areas of household spending including energy bills and food shopping.

By raising the cost of borrowing for individuals and businesses, the central bank hoped to reduce demand, slowing the flow of new money into the economy.

In theory, more expensive mortgages and better savings rates should also encourage people to save more and spend less, further pushing down inflation.

Inflation reached a peak of 11.1 per cent in October 2022. From February 2023 to November 2023 it consistently fell, and there were hopes a base rate cut may be on the horizon.

However, a surprise rise in inflation in December 2023 made that far less likely.

Consumer price inflation edged up from 3.9 to 4 per cent, which disappointed against forecasts of a fall to 3.8 per cent. It then remained at 4 per cent in January, once again disappointing based on forecasts.

However, inflation fell to 3.2 per cent in March and is expected to fall further over the coming months with the April data reflecting a 12 per cent annual fall in energy bills, according to ING forecasts.

The Bank of England is projecting CPI inflation to fall to slightly below the 2 per cent target by June.

When will the Bank of England cut rates?

Towards the end of last year, forecasts for where the base rate would peak fell from a high of 6.5 per cent to the current 5.25 per cent level.

While the Bank of England has not ruled out further rises, market expectations generally point towards a cut in the base rate later this year.

At present, markets are pricing in two interest rate cuts in 2024, with the first coming in either June or August.

Andrew Hagger, personal finance expert and founder of website MoneyComms said: ‘I think base rate could end the year at around 4.75 per cent – so two quarter point cuts starting late summer.

‘I think the MPC will err on the side of caution due to uncertainty about wage growth and having one eye on how quickly core inflation tails off.’

But it’s fair to say that economists are divided on how far rates will fall this year.

Base rate could fall as far as 4 per cent by the end of this year, according to the latest forecasts from Capital Economics.

Paul Dales, chief economist at Capital Economics thinks the first cut will come next month.

‘We are still pencilling it in for June and have assumed rates are cut by 25 basis points then and by 25 basis points at every subsequent meeting until they reach 3 per cent in 2025,’ said Dales.

‘The June forecast is based on the idea that by then CPI inflation will have fallen below 2 per cent and that other measures of the persistence of inflation, such as CPI services inflation and wage growth, will also have eased significantly from current levels.’

One group of independent economists who shadow the Bank of England has called for interest rates to be cut immediately.

The Institute of Economic Affairs’ Shadow Monetary Policy Committee thinks the Bank of England should have cut interest rates by at least 50 basis points today.

Dr Andrew Lilico, chair of the Shadow Monetary Policy Committee and executive director of Europe Economics, said: ‘The Bank of England was too slow raising rates when inflation was rising because it missed the clear message from rapid growth in the money supply data.

‘It has made a similar mistake in recent months but in the opposite direction: money supply has contracted or grown only far too slowly for many months, yet the Bank has failed to cut rates.

‘The consequence so far has been that inflation is well below what the Bank predicted.

‘The consequence in the future will be inflation significantly under-shooting the target and economic growth being damaged. Rates should be cut immediately.’

What does this mean for mortgage borrowers?

The higher base rate has led to higher mortgage costs for many – especially those who have needed to remortgage.

As many as 1.6 million mortgage borrowers will roll off their fixed rate mortgages over the course of this year, many of whom will currently be on a rate of 2 per cent or less.

The average two-year fixed mortgage rate is now 5.93 per cent, according to Moneyfacts, and the average five-year fix is 5.5 per cent.

> Check the best mortgage rates based on your home’s value and loan size

These rates are much higher than many borrowers have been used to, but they have come down substantially from highs reached last summer.

Only as far back as August, those averages were 6.86 per cent and 6.35 per cent respectively.

That said, rates have been back on the rise in recent weeks. At the start of February those averages were 5.56 per cent and 5.18 per cent.

Anyone rolling off a cheaper fixed rate deal this year could be in for a financial shock.

The average borrower who took out a five-year fix in March 2019 would be on a rate of 2.85 per cent, according to Moneyfacts. 

If they opted for another five-year fix when they remortgaged, they could be paying 5.5 per cent.

For someone with a £200,000 mortgage being repaid over 25 years, that’s the difference between paying £933 a month and £1,228 a month – a rise of £295.

Many people will get a cheaper rate than the average, especially if they have more equity in their home and a good credit profile.

However, even those with the biggest deposits or largest amount of equity will see their costs rise. Exactly five years ago, the cheapest five-year fix was 1.78 per cent. Now, it’s 4.24 per cent.

For someone with a £200,000 mortgage being repaid over 25 years, that’s the difference between paying £826 a month and £1,082 a month.

It is worth speaking to a mortgage broker to find the cheapest deal that you may be eligible for.

> How to remortgage your home: A guide to finding the best deal

Mortgage borrowers on tracker and variable rates may be disappointed that the base rate has not started to go down.

Variable rate mortgages include tracker rates, ‘discount’ rates and also standard variable rates (SVRs). Monthly payments on all these types of loan can go up or down.

Trackers follow the Bank of England’s base rate plus a set percentage, for example base rate plus 0.75 per cent. They often come without early repayment charges, allowing people to switch whenever they like without incurring a penalty.

Standard variable rates (SVRs) are lenders’ default rates that people tend to move on to if their fixed or other deal period ends and they do not remortgage on to a new deal.

These can be changed by lenders at any time, and will usually rise when the base rate does – but they can go up by more or less than the Bank of England’s move.

According to Moneyfacts, the average SVR is 8.18 per cent, up from an average of 4.4 per cent in December 2021 when base rate was just 0.1 per cent – but it will vary from lender to lender.

A typical homeowner could face unnecessary costs of £278 per month if they forgot to renew their mortgage deal in time, new research has shown.

> Most expensive standard variable rates: Is YOUR lender charging nearly 10%?

Rachel Springall, finance expert at Moneyfacts said: ‘Borrowers may be disappointed to see fixed mortgage rates are on the rise. 

‘As has been the case since October 2022, the average five-year fixed mortgage rate remains below its two-year counterpart, which edges ever closer to 6 per cent, not seen since December 2023.

‘However, fixed rates are lower than they were six months ago, so consumers who are now coming off a two or five-year fixed mortgage would be wise to act quickly to grab a competitive deal, particularly as some lenders have withdrawn deals priced below 5 per cent.

‘The mortgage market continues to be fluid despite no change to the Bank of England base rate since August 2023, and market forecasts have pushed back imminent cuts, due to stubborn inflation.’

Chris Sykes, associate director at Private Finance added: ‘The recent mortgage rate rises have postponed some people’s property plans in anticipation of future lower mortgage rates. 

‘Yet, the timing and magnitude of these potential decreases remain uncertain and may not align with expectations. This raises the question of the current market’s opportunities. 

‘Current declines in demand, coupled with a slowdown in house price growth, could present an advantageous buying window before the market potentially shifts later this year. 

‘Looking ahead, a decrease in the base rate could instil confidence and spur a resurgence in demand. Solicitors, mortgage brokers and lenders could become more busy driving up transaction times.’

What next for fixed rate mortgages?

Mortgage borrowers on fixed term deals should focus less on the base rate decision today, and more about where markets are forecasting the base rate to go in the future.

This is because banks change their fixed mortgage rates pre-emptively, on the back of predictions about where the base rate will ultimately be in the future.

It is why the cheapest mortgage rates are now more than 1 percentage point below the base rate.

Market interest rate expectations are reflected in swap rates. These swap rates are influenced by long-term market projections for the Bank of England base rate, as well as the wider economy, internal bank targets and competitor pricing.

Sonia swaps are used by lenders to price mortgages, and these have been rising in recent weeks. This is one of the reasons why some lenders have slightly increased their mortgage rates.

In early January, two-year swap rates were at 4.04 per cent, but as of today they have ticked up to 4.49 per cent. Five-year swaps were at 3.41 per cent and have risen to 3.94 per cent.

That still offers a much more positive picture of the future of interest rates than in summer 2023, when five-year swaps were above 5 per cent and two-year swaps were coming in around 6 per cent.

The lowest two-year and five-year fixed mortgage rates currently available are trending very closely to their equivalent swaps.

To put that in context, from a historical perspective, it is very rare for the lowest priced fixed mortgage rates to go below swap rates, albeit it did happen in January for a very short period of time.

It’s also worth pointing out that prior to the quickfire base rate rises between December 2021 and August 2023, the lowest mortgage rates have trended above base rate. That was the case at least between 2008 and 2022.

This means that even if the base rate settles at between 3 per and 4 per cent, we can expect mortgage rates to be higher than that.

– Read: Is a two-year fix mortgage still a good bet? 

The view among mortgage brokers is that rates are unlikely to change much – at least for now. 

Nicholas Mendes, mortgage technical manager at John Charcol said: ‘Until a reduction in the bank rate occurs, there will be a period of uncertainty that prompts markets to speculate and continually adjust their forecasts.

‘This situation is expected to lead to an ongoing phase of repricing by lenders. Lenders are continually adjusting their profitability margins in response to changes in funding lines and shifts in market competition.

‘This adjustment process is a direct reaction to the uncertain financial environment, as lenders strive to maintain their competitive edge while managing their financial risks.

‘Swaps have reduced slightly in recent days as markets price in a rate reduction, which should pave the way for lenders to reprice marginal decreases over the next fortnight.’

What does the base rate pause mean for savers?

The Bank of England’s successive interest rate rises between December 2021 and August 2023 were, by and large, good news for savers.

It meant that savings accounts offered some of the highest interest rates seen since 2008.

Now, with the base rate peak solidly parked at 5.25 per cent since August 2023, savers might see it as the end of the rate heyday for their nest eggs.

And they would be right. Previous headline-grabbing deals including Santander’s 5.2 per cent special edition easy-access rate and NS&I’s one-year bond paying 6.2 per cent have vanished.

Fixed-rate accounts have been hit the hardest. The best one-year fixed-rate account on the market now pays 5.18 per cent, down from a high of 6.2 per cent in October 2023.

However, savers should take some comfort in that at least 1,364 savings accounts available still beat inflation which came in at 3.2 per cent last month. This is crucial because it means the value of your money is not falling in real terms.

Easy-access rates have fared slightly better and held steady, falling less sharply than their fixed-rate counterparts.

The best easy-access rate pays 5.02 per cent, down from a high of 5.2 per cent a few weeks ago – so these accounts have dropped less sharply from their peak than one-year fixed-rates.

Since the start of November 2023, the average easy-access savings rate has fallen from 3.19 per cent to 3.11 per cent and the average easy access Isa rate has risen from 3.29 per cent to 3.33 per cent.

Andrew Hagger says: ‘I don’t expect there to be a great deal of movement in rates – in fact some providers have been increasing rates on some fixed rate savings and Isa products in recent weeks.

‘I think there will be a little tinkering in and around the best buy rates but I’m not expecting any major rate movements.’

Rachel Springall, finance expert at Moneyfacts Compare, said: ‘One area of the market to thrive over recent months has been cash Isas.

‘Easy access returns have fallen recently, but unlike accounts outside of an Isa wrapper, they are higher than they were six months ago.

‘A positive Isa season has been the key to improving accounts for savers this year, ideal for those looking to protect their cash from tax.’

> Check the best savings rates using This is Money’s independent best buy tables

Is it downhill from here for savings rates?

Rather than savings rates crashing down to earth, most experts are expecting a gradual decline over the coming months.

Easy-access rates have been slowly falling over the last six months, and the top rate on offer has dropped from 5.2 to 5.02 per cent.

Rachel Springall, finance expert at Moneyfacts Compare said: ‘Savers will find variable rates have remained rather robust over the past six months, but there have been cuts made to easy-access accounts.

‘They remain a firm favourite with savers, and there is hope that the market will stay resilient over the next few weeks, as expectations of an imminent base rate cut have waned.

Andrew Hagger said: ‘I think it is downhill for savings rates from here, but there’s no need for major panic.

‘I’m not anticipating a major slump over the remainder of 2024, but would recommend locking in to fixed deals sooner rather than later if you’re currently thinking about it but currently sitting on the fence.

‘I think the base rate could end the year at around 4.75 per cent (so two quarter point cuts starting late summer) – when this happens we’ll see similar almost mirror rate cuts on easy access rates and depending on base rate forecasts for 2025 then lower swap rates will see reductions in fixed rate products too.’

Which banks offer the best savings rates?

When it comes to choosing an account, it’s always worth keeping some money in an easy-access account to fall back on for when life throws you a curveball.

Most personal finance experts believe that this should cover between three to six months’ worth of basic living expenses.

The best easy-access deals, without any restrictions, pay just north of 5 per cent. If you’re getting a lot less than this at the moment, you should seriously consider switching to a provider that pays more.

In terms of the best of the best, Oxbury Bank is now offering a market-leading easy-access deal paying 5.02 per cent.

Someone putting £10,000 in this account could expect to earn £502 in interest over the course of a year.

> Find the best easy-access savings rates here

Those with extra cash which they won’t immediately need over the next year or two should consider fixed-rate savings.

The best one-year deal is offered by Smartsave Bank, paying 5.18 per cent.

The gap between one year-fixed rate deals and easy-access accounts has narrowed to just 0.17 per cent.

Long gone are the days of one-year fixed-rate accounts paying 6 per cent or more, as was the case in October 2023 when NS&I was offering a 6.2 per cent one-year fix.

There are still at least 18 one-year fixed-rate accounts offering a rate of 5 per cent or more. This is down from 19 at the last Monetary Policy Committee meeting in March.

A saver putting £10,000 in Smartsave’s one-year fix will earn a guaranteed £518 interest over one year. It comes with full protection under the Financial Services Compensation Scheme up to £85,000 per person.

Other top one-year saving accounts are Alicia Bank which is paying 5.17 per cent, Close Brothers Savings paying 5.16 per cent and Atom Bank paying 5.15 per cent. All offer FSCS protection.

> Check out the best fixed-rate savings deals here

Savers should also consider using a cash Isa to protect the interest they earn from being taxed.

The top one-year fixed-rate cash Isa is paying 4.72 per cent interest, while the top two-year fix is paying 4.63 per cent.

Those wishing to keep their money in an easy-access cash Isa can also get 5.17 per cent with Plum Bank.

Springall said: ‘Challenger banks and building societies continue to offer the top easy access rates, so savers would be wise to review their account and switch if their loyalty is not being rewarded.

‘Consumers worried that interest rates are due to come down this year may want to grab a deal quickly and review their existing pots. Variable savings rates can change at any time and, as we have seen in the past, a base rate cut can have a detrimental impact on the savings market.

‘Those prepared to lock their cash away for a guaranteed return could grab a fixed rate bond, as some one-year deals still pay over 5 per cent, but six months ago there were some paying 6 per cent.

‘Whichever account savers choose, any clear indications of an impending base rate cut could lead to an upheaval in the market, so savers must not be complacent. As is evident, many of the top rate deals can be cut or withdrawn quickly if providers are facing an influx of deposits, so savers need to keep a close eye on the top rate tables to not be left disappointed.’

> Check out the best cash Isa rates here