On August 1, The Bank of England cut the base rate from 5.25% to 5%, the first reduction in interest rates since March 2020. The rate had stood at 5.25% since August 2023, having undergone 14 consecutive rises from December 2021, when the rate was 0.1%.
Companies’ reports on increasing house prices
Nationwide reported that house prices increased by 0.3% in July, compared to 0.2% in June. This took the annual rate of increase to 2.1% compared to 1.5% in the previous month. In June, the cost of the average home was £266,334 compared to £266,604 last month.
Halifax’s latest house report showed that the average property value decreased by 0.1% in May, followed by a reduction of 0.2% in June. The annual growth remained consistent at 1.6%. Halifax put the average home cost in June at £288,485 compared to £288,688 in May.
The Monetary Policy Committee (MPC)
The Bank of England base rate is usually voted on by the MPC eight times a year. However, the MPC has the power to make spontaneous changes to the base rate if they think it is necessary. The committee used this power back in March 2020, when it reduced the base rate due to the potential effects of COVID-19 on the economy.
The base rate can be adjusted up or down, but the decision is based on the current economic circumstances. The MPC also aims to keep inflation as close as possible to the target of 2%.
Why does the Bank of England change the base rate?
The Bank of England changes the base rate to manage the economy and control inflation. When the base rate rises, interest rates rise too, which encourages people to save more and spend less, which helps to reduce inflation. Alternatively, when the base rate reduces, interest rates fall. If the MPC feels that the spending levels are increasing too quickly and there is a risk of inflation rising, it may raise the base rate. On the other hand, if the economy would benefit from higher spending by consumers, it would lower the base rate.
Will the base rate impact mortgage?
Changes to the Bank’s base rate can impact how much interest is paid on loans, including mortgages. The change of the base rate will not affect payments immediately and will not change until the end of your deal. On the other hand, if you are on a tracker or variable rate mortgage, which follows the base rate, your monthly payments will take on board these changes too.