On Thursday, the Bank of England’s Monetary Policy Committee (MPC) will meet to make a decision on the standard base interest rate. According to economists, the expectation is for the majority vote to hold the rate steady. Inflation was last reported at 3.2%, still far from the Bank’s target rate of 2.0%. This is unfortunate for borrowers, for not only will they still face higher interest rates, but inflation is still above target and it will take some time before the relief from inflation is felt. 

The last meeting of the MPC gave an indication a cut is on the way, just not yet. For the first time in two years, a member, Swati Dhingra, voted to cut the base rate by 0.25%. 

The Bank’s current rate is 5.25% and has remained so since it was increased in August 2023.

In the start of the year, an early spring cut to the rate had seemed possible. Then the forecast postponed a rate cut for June, and the latest forecast is for the first rate cut to be in August. A possible second cut could occur before the end of the year, if inflation responds favorably to the first cut.

If the rate is kept steady, it will be the sixth consecutive meeting holding the rate at 5.25%. 

The Bank’s standard base interest rate is a tool for bringing down inflation. By increasing the cost of borrowing, it is hoped that spending will slow. If spending slows, then inflation will as well, and when a higher interest rate reaches the level to bring inflation downward, it has reached a level in which prices will, in theory, decline as demand falls.

However, pay growth has impacted the rate at which inflation will decline by enabling spending. By keeping up with the cost of living, the cost of living remains higher than before. 

In keeping the rate steady, it allows the MPC’s decision to do work against inflation and curb spending, but not to the point of the rate crashing downward.

It is a delicate balance, and one in which the MPC does not want to get wrong. Lowering the rate too soon could keep inflation around longer and possibly spark an increase in spending such as in the housing market. It could require the MPC to reverse their decision and raise the rate should inflation become stubborn and sit far above target or actually see growth.

There are experts expecting a drastic decline of inflation in the next report. Should it reach target in May, there is a stronger possibility of a rate cut in June. There would not likely be a deep cut to the base rate, but rather a minimal one such as 0.25%. Then perhaps another in August should inflation remain under control. 

The good news is that inflation is expected to reach the target rate of 2.0% sometime this year. Consumers will not see an immediate relief from inflation, but it will slowly start be felt at the consumer level. What could be more immediate is the impact a lower base rate will have on borrowing.  

Home buyers will find purchasing a home is more affordable in borrowing, but seller asking prices could rise as demand grows in the housing market. Those with credit card borrowing will not likely see any relief, but those obtaining new personal or business loans will see lower interest rate choices.

Homeowners shopping will see some relief if the MPC cuts the base rate, but there is currently a slight unexpected situation in mortgage and remortgage lending.

As optimism grew for an early spring rate cut, lenders began to lower their offers to gain the attention of borrowers despite the MPC holding the rate steady. Inflation failed to impress with a strong decline, and lenders began to pull their lowest rates, some of which fell below the base rate.

There are still offers near the base rate to be found in both mortgages and remortgages, but in just the last two weeks there are much fewer than before. This could translate to the rates of only weeks ago, or those available now will be the rates available once the MPC votes for their first minimal cut.

How lenders will respond to the MPC voting to cut the rate is unknown. A competitive environment such as seen earlier this year could develop, or lenders will be cautious after their decisions in early 2024 and proceed to offer less than impressive borrowing opportunities.

The meeting this Thursday will be followed by another on 20 June. The next report on inflation will be released on 22 May, which will reflect the data for April and comes without the ability to influence the May MPC vote. The inflation report in June, reporting on May inflation, will be released on 19 June, one day before the June MPC meeting.

As the inflation reports arrive, it will offer more information as to what could be expected in the months ahead, though lenders will react in their own unique way, and borrowers can only guess if rates now or later will be the best to be had in the first half of 2024.