Bank of England holds interest rates at 5.25% again

Interest rates have been held at 5.25% for the seventh time in a row by the Bank of England.

It means interest rates remain at a 16-year high.

Despite inflation hitting the Bank’s 2% target yesterday for the first time in almost three years, most economists had predicted that rates would stay frozen today.

The cost of borrowing has been stuck at 5.25% since August 2023.

The news will come as a blow for homeowners and first-time buyers facing high mortgage costs , while savers may be happy that interest rates haven’t been cut just yet.

Monetary Policy Committee (MPC) members voted to hold the rate by 7-2, the same as the MPC split in May . Two members preferred to reduce Bank rate by 0.25 percentage points, to 5%.

The Bank of England’s governor Andrew Bailey, said it was “good news that inflation has returned to our 2% target", adding: “We need to be sure that inflation will stay low and that’s why we’ve decided to hold rates at 5.25% for now.”

Kevin Shaw, national sales managing director at property services group LRG, comments: “The Bank of England’s decision to hold interest rates at 5.25% is no surprise given the proximity to the general election .

“Had the Bank lowered rates for the first time in 11 months just two weeks before the polls, the decision may have been interpreted as politicking.”

What is the outlook for UK interest rates?

Analysts have spent much of the year wondering when interest rates will finally go down.

There were hopes that a rate cut would materialise early this year as inflation started to slow, reaching a three-year low of 3.2% in March .

But it hasn’t dropped as fast as the markets hoped. While inflation finally hit the Bank of England’s 2% target yesterday, analysts believe the Bank will wait to see if inflation stays at 2% before reducing rates.

The next MPC meeting is on 1 August, with the following one on 19 September.

The minutes of today's MPC meeting suggest that the Bank could be open to cutting rates in August. It said: "As part of the August forecast round, members of the committee will consider all of the information available and how this affects the assessment that the risks from inflation persistence are receding. On that basis, the committee will keep under review for how long Bank rate should be maintained at its current level."

Shaw is optimistic that rates will drop on 1 August. “It was in August last year that interest rates reached their recent high (the highest since February 2008) and the property industry, including the millions of consumers impacted, would welcome a long-awaited reduction.

“The housing market has seen cumulative growth throughout 2024 but affordability remains an issue for some, specifically first-time buyers.

“So while I wouldn’t dare to predict the news headlines on 5 July [following the general election ], I am reasonably confident in predicting a drop in interest rates on 1 August.”

Kevin Brown, savings specialist at Scottish Friendly, agrees, saying: “The likelihood now is, as we have a summer break of sorts, that the MPC will reconvene in August to observe the lay of the land, where we’re likely to see a first cut, assuming inflation doesn’t tick up again."

The next set of inflation data will be released on 17 July. This will cover the 12 months to June.

What the interest rate freeze means for mortgage borrowers

Mortgage rates have risen over the past four months as hopes of an interest rate cut get pushed further back.

The average two-year fixed-rate mortgage has increased from 5.8% in April to 5.96% today, and from 5.39% to 5.53% on a five-year deal, according to Moneyfactscompare.co.uk.

With the Bank of England holding the cost of borrowing, there is little motivation for mortgage lenders to cut rates.

Rachel Springall, finance expert at Moneyfactscompare.co.uk, said the rising cost of mortgages was causing “deep concern” for borrowers about to come off a fixed-rate deal and needing to refinance, and for first-time buyers.

“Homeowners unsure on whether to lock into a new fixed-rate mortgage may still find it more affordable than falling onto a standard variable rate (SVR), which stands above 8%.

“This rate has almost doubled since the Bank of England started increasing base rate back in December 2021. A typical mortgage being charged the current average SVR of 8.18% would be paying £287 more per month, compared to a typical two-year fixed rate (5.93%).”

What the interest rate freeze means for savers

Savers may feel relieved that the Bank has left interest rates at 5.25% again. And despite a rise in mortgage rates - due to expectations of a rate cut - savings rates have not dropped by much this year.

Data from Moneyfactscompare.co.uk reveals that the average easy-access savings rate has only fallen from 3.18% to 3.12% since December 2023, while the average easy-access cash ISA rate stands at 3.31%, as it did six months ago.

Springall notes: “The top rate tables continue to be dominated by challenger banks and building societies, but with the average rate on easy-access accounts around 3%, there will be many savers out there getting a poor return. It is very unpredictable to know where interest rates are going, but the consecutive base rate hikes from the Bank of England between December 2021 and August 2023 worked in favour of savers.

“The cash ISA market has also seen a flurry of activity over the past six months, but variable rates are slightly down month-on-month. However, this should not deter savers from reaping the benefits of investing cash in an ISA wrapper, to protect any interest earned from tax.”

Tobias Gruber, CEO of My Community Finance, adds: “The Bank of England’s decision to hold the base rate will give savers more time to review their options and move their savings to a provider offering generous returns before interest rates are cut.

“When one savings provider changes their rates, others quickly follow suit, so it’s important for savers to take action sooner rather than later before the best deals disappear.”