The Bank of England has decided to keep interest rates at 4.5%, citing growing uncertainty in the global economy and trade. Factors like US trade tariffs and rising costs for businesses have contributed to a cautious approach. While many expected this decision, Bank Governor Andrew Bailey confirmed that interest rates are expected to decline gradually.
Experts predict two rate cuts by the end of the year, with the next possible adjustment in May. Inflation, currently at 3%, remains above the Bank’s 2% target. The Monetary Policy Committee (MPC) voted 8-1 in favor of maintaining the current rate, balancing inflation control with economic stability.
Impact on Borrowers and Homeowners
Interest rates influence borrowing costs, affecting mortgages, loans, and credit cards. Around 600,000 UK homeowners have mortgages tied to the Bank’s rate, meaning no immediate change in their repayments. However, those with fixed-rate deals will face higher costs once their terms end.
Mortgage rates have seen a slight drop, with two-year fixed rates averaging 5.33% and five-year fixed rates at 5.18%. Yet, many homeowners remain anxious about the financial impact.
For instance, Louise Gibson from Surrey is worried about her mortgage payments after her five-year fixed deal at 1.52% ends in October. She has already cut back on spending and is considering extending her mortgage term to reduce monthly payments.
Economic Challenges and Rising Costs
Despite lower inflation compared to previous years, many households still struggle with rising costs. Bills for energy, water, and council tax are set to increase in April. According to the Office for National Statistics, direct debit failures rose by 2% in February, showing that more people are struggling with loan and mortgage repayments.
UK businesses are also facing uncertainty, especially those involved in exports. The Bank noted that many firms are in a “wait and see” mode due to US trade tariffs and an upcoming increase in National Insurance contributions. Businesses are worried about potential price hikes and have started pausing hiring and cutting investments.
What’s Next for Interest Rates?
The Bank has made three rate cuts since August 2024 after earlier increases to combat inflation. Energy and food prices, influenced by the COVID-19 pandemic and the war in Ukraine, drove inflation higher. While inflation is expected to rise slightly to 3.7% this year, the Bank predicts a gradual decline over time.
Andrew Bailey stressed the importance of caution in adjusting rates too quickly. Increasing interest rates helps control inflation by reducing spending, but keeping them too high for too long could slow economic growth.
With inflation projected to remain above 2% until 2027, the government faces pressure to boost economic growth. Chancellor Rachel Reeves emphasized efforts to ease the cost of living, while opposition leaders criticized recent budget decisions.
As businesses and consumers navigate financial uncertainty, all eyes remain on the Bank’s next move. Will rates drop soon? The coming months will be crucial in shaping the economic landscape.
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