The possibility of a Bank of England rate cut next week is highly likely as the UK economy saw a decline for the second consecutive month, according to experts.
Concerns over potential tax increases in the upcoming Budget by Chancellor Rachel Reeves led to a decrease in spending and overall economic output. Data from the Office for National Statistics confirmed a 0.1% contraction in the economy in October, contrary to the expected growth. This followed a similar contraction of 0.1% in September. The UK economy has remained stagnant or declining since June, with gross domestic product failing to show growth in the past four months.
Economists are increasingly convinced that the Bank of England will lower its base rate from the current 4% at the upcoming Monetary Policy Committee meeting next Thursday, especially in light of the latest economic data.
Neil Wilson, the UK investment strategist at Saxo Markets, stated that a rate cut next week is almost certain and predicted further cuts in 2026. Lindsay James, an investment strategist at asset manager Quilter, also indicated that a rate cut next week is becoming more probable.
Philip Shaw from Investec Economics forecasted that Bank of England Governor Andrew Bailey would switch his vote to support a base rate reduction at the forthcoming meeting, resulting in a narrow majority in favor of a cut.
TUC General Secretary Paul Nowak urged the Bank of England to acknowledge the impact of the living standards crisis on households and businesses, emphasizing the need for additional interest rate cuts next week.
Implications of a rate cut for borrowers:
A rate cut to an anticipated 3.75% would offer further advantages to mortgage and other borrowers.
Lenders have intensified a rate competition on new fixed-rate mortgage deals in anticipation of a rate reduction. Last Monday, NatWest and Barclays reduced the costs of fixed-rate mortgages for new customers, following over 20 lenders who had lowered rates the previous week.
Borrowers with variable rate mortgages, including those on standard variable rate (SVR) or discounted/tracker deals, would benefit from a rate cut next week, provided that the savings are passed on.
According to L&C Mortgages, a base rate cut to 3.75% could save the average borrower with an SVR and a £100,000 home loan £16 monthly on repayments, increasing to £24 for a £150,000 loan and £32 for a £200,000 loan balance.
While most new homebuyers opt for fixed-rate mortgages that do not directly track the base rate, the base rate influences swap rates that lenders use to determine costs.
Implications of a rate cut for savers:
Millions of savers have been advised to take action promptly amid concerns that some of the top deposit rates may be withdrawn.
Anna Bowes, a personal finance expert at The Private Office, recommended considering fixed-term accounts before potential rate cuts take effect, as the best buy savings rates are currently stable.
Kara Gammell, a personal finance expert at MoneySuperMarket, suggested that savers secure the best available rates promptly, as they are expected to decrease or be removed if a base rate cut is announced by the Bank of England.
It is also recommended to review ISA allowances and consider spreading funds across different account types for better financial management.