Not in years has there been as much attention on the decision of the Bank of England’s Monetary Policy Committee (MPC) as there is now. The committee will be meeting tomorrow and if they vote to lower the standard base interest rate it is a sign the economy is strongly moving toward recovery. It would be the first time a rate cut has occurred since March 2020. It was then the MPC voted to cut the rate to almost zero at 0.1% in response to the global pandemic’s impact on the UK economy. It remained at the historical low level until December 2021 when the MPC voted to increase the base rate by more than double to 0.25%. Every meeting of the MPC afterwards through August 2023 resulted in a rate hike when it rose to 5.25%. Since then, borrowers have faced higher interest rates as the Bank’s rate is at a sixteen-year high.

The MPC has been battling inflation and has resisted the cries of those that were facing hardship due to higher interest rates, including homeowners and home buyers. Home buyers were capable of walking away from the housing market and higher mortgage rates, but only to settle into higher rental costs. Homeowners that took advantage of the historical low lender rates that resulted when the base rate was at 0.1% and took out a fixed rate deal had locked in their cheap rate, but as their mortgage terms ended, they faced a substantial hit to their household budget.

Some homeowners could have watched their fixed mortgage term end and faced choosing a new remortgage rate of double or more their old rate. However, skipping a remortgage put them at a greater hardship as their lender would transition them to their standard variable rate (SVR) which is usually double or more the rates found with a remortgage. So, while their old historically low and cheap rate would end, even with higher remortgage rates it saved money by avoiding the higher SVR. Also, with a remortgage a fixed rate could be chosen while the SVR would increase as it is variable and would do so when the lender deemed necessary.

The most popular mortgage for first time buyers during the pandemic was a two-year fixed rate mortgage. Those deals have been ending year after year and this year millions more were due to end as they either bought in 2022 when rates were rising, or they remortgaged then to lock in a lower rate.

The need to cut the base rate has been felt deeply by borrowers, and even though the hardship was difficult, the MPC was fighting a greater financial enemy in inflation. In October 2022, inflation reached a peak of 11.1%. It remained stubborn despite higher interest rates and throughout 2022 the MPC voted for rate hikes and continued to do so until August 2023. In September 2023, the committee voted to hold the rate steady hoping they had reached the peak rate to fight inflation and borrowers exhaled, exhausted from the rising costs as well as the strain of inflation. 

There remained the possibility of another rate hike as inflation remained stubborn. It was not until May this year that it reached the target rate of 2.0%. The June report on inflation, which covers the data for the twelve months to May, showed inflation remained at target. However, some sectors of the economy are still struggling with inflation, including the services sector. The expectation was for it to decline to 5.1% but it remained at 5.7% in the June report. This is partially the reason for the MPC to vote for the base rate to remain steady in June.

The May and June MPC meetings resulted in seven members voting for the rate to remain at 5.25% while two voted for a rate cut of 0.25%. It is expected more MPC members will vote for a rate cut in the meeting set for tomorrow on 1 August, but there might not be a majority vote to cut the rate.

If the rate cut does not occur, the next possibility is in September at the next scheduled meeting on 19 September, and the inflation report for September will be released the day prior on the 18th. If the MPC votes to keep the rate steady tomorrow, they will have two inflation reports in hand from 14 August and 18 September before their next meeting. 

Holding the rate steady allows the MPC to take a strong position against inflation and allows for the services sector and others to be tamed further by the base rate at 5.25%.

If the MPC votes to cut the rate, it is expected it will be a slight cut at 0.25% taking the rate to 5.0%. 

However, whether the MPC votes for a rate cut or not, lenders have chosen to take the lead and have already been cutting their rate offerings. There are mortgage rates below 5.0% already available from lenders. Mortgage rates are lower than remortgage rates, but both have become incredibly attractive and offer savings to borrowers without having to wait on the MPC and whether the first rate cut in over four years happens tomorrow or later on.