The Bank of England (BoE) has announced a cut to its base rate to 5%, the first drop in interest rates since the onset of the COVID pandemic in March 2020.

Interest rates had been held at 5.25% at seven successive meetings between the Bank’s Monetary Policy Committee (MPC), since they were first increased to that level in August last year.

At the latest meeting, the MPC voted by a narrow majority of five to four to reduce the base rate by 0.25 percentage points, to 5%. Four members were in favour of maintaining the bank rate at 5.25%. The BBC has also reported that one of the members who voted to hold rates, Jonathan Haskel, will be replaced by the next meeting.

The Bank’s decision to move the base rate for the first time in a year comes as the 12-month CPI inflation rate was at the MPC’s 2% target in both May and June.

Governor of the BoE, Andrew Bailey, said that inflationary pressures have “eased enough that we’ve been able to cut interest rates”.

“We need to make sure inflation stays low, and be careful not to cut interest rates too quickly or by too much,” he added in a statement. “Ensuring low and stable inflation is the best thing we can do to support economic growth and the prosperity of the country.”

Prior to the BoE’s recent moves to hold interest rates for seven times in a row, the central bank had raised its base rate from a record low in the pandemic at 14 successive MPC meetings since December 2021 – a cycle that helped to slow the rate of inflation, but also led to large increases in mortgage payments.

Executive director of research at Zoopla, Richard Donnell, suggested the cut to the base rate will now deliver a “confidence boost” to the housing market, rather than herald the start of a big drop in mortgage rates.

"Mortgage rates have fallen this year which is why measures of market activity are all on the up,” Donnell commented. “We are already on track for 10% more sales in 2024 and price rises of 2%. Buyers are paying almost 97% of the asking price, which is the highest level for 18 months. Today's cut will support the current momentum in the market.

“Mortgage rates of 4-5% are likely to be the new norm and while there is headroom for borrowing costs to fall further into 2025, it's important would-be home movers speak to their bank or a broker to understand what they can afford.”

Just Mortgages and Spicerhaart CEO, John Phillips, said: “The reality is this needed to happen, not just to breathe some life into the economy, but to help take some of the pressure off borrowers – particularly those on a tracker or on SVR.

“While we may not see lenders react instantly to today’s news – as many have already priced in a cut and made reductions accordingly – it’s likely to be the starting pistol for increased competition amongst lenders. All have their own targets to hit and need to lend to make money, so it’s only right to expect greater activity as they look to increase volumes and market share.

“Today’s news will likely be the impetus for many potential borrowers or movers to return to the market and get their plans back on track.”

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