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After a shaky start to the year, the Bank of England has announced a reduction in the base interest rate from 5.25% to 5%.
While not a huge drop, this is clearly a strategic move by the Bank to stimulate economic growth amid a challenging financial environment.
Some critics have voice concerns that the Bank has done this too quickly, but the majority have welcomed the move – even if it is only a 0.25% reduction.
But what, if anything, does this actually change for shoppers in the UK this year?
What is the Base Rate?
In case you needed clarification, the base rate (set by the Bank of England) is the interest rate at which it lends to commercial banks.
This rate influences the interest rates that banks charge consumers and businesses, and affects everything from mortgages to personal loans and savings accounts.
What does this mean for you?
Overall, a lower base rate means the cost of borrowing money goes down – which is largely a good thing. But it can also mean that savings and investments might not yield the same returns as when the base rate was higher.
1. Mortgage and loan rates
For many homeowners, a decrease in the base rate often translates to lower mortgage rates – particularly for those with variable or tracker mortgages. If you’ve already fixed your mortgage, you unfortunately won’t benefit from the base rate reduction until your fix expires.
Personal loans and credit cards may also see a slight decrease in interest rates – though this depends on the borrowing terms and agreement.
2. Savings accounts
While borrowers may benefit, it’s not great news for savers, who could see lower returns on their savings accounts. Interest rates on savings are closely tied to the base rate, meaning banks may offer less attractive rates on savings accounts and ISAs. We’ll likely see savers looking into alternative investment opportunities to achieve better returns.
3. Consumer confidence
A clear positive from the base rate decrease is that this usually boosts buyer confidence, as it’s generally a sign that inflation is under control. H2 of 2024 will hopefully see higher spending on goods and services, contributing to economic growth.
In conclusion
The base rate cut probably won’t introduce immediate benefits for many consumers – but it’s hopefully a sign that further cuts could be on the horizon.
