Bank of England cuts interest rates to 4.75% – but mortgages still set to rise

But experts forecast Rachel Reeves’s first Budget will drive up inflation over next two years

Interest rates have been cut for the second time this year, by a quarter of a percentage point - but mortgage rates are still set to rise in a blow to homeowners.

The Bank of England reduced the base rate from 5 per cent to 4.75 per cent on Thursday, following a 0.25 percentage-point cut in August, which was the first drop in four years.

Governor Andrew Bailey said rates were likely to “continue to fall gradually from here”, but warned they could not be cut “too quickly or by too much”.

Mortgage repayments are set to fall (Getty Images)

But the Bank’s Monetary Policy Committee (MPC) forecast that Rachel Reeves’s first budget as chancellor would push up inflation by up to half a percentage point over the next two years, contributing to a slower decline in interest rates than previously thought.

Measures such as raising the bus fares cap and VAT on private school fees would drive prices up at a faster rate, the committee said.

These moves are predicted to increase inflation by 0.3 percentage points next year.

The base rate cut came despite the fact that fixed mortgage and savings rates have gone up this week and are expected to rise further over the coming weeks.

Lenders including Virgin Money, Halifax and Coventry Building Society have all increased their fixed mortgage rates by up to 0.25 percentage points, and according to financial data firm Moneyfacts, average two-year fixes are up from 5.39 per cent a week ago to 5.42 per cent, and the average five-year fix is up from 5.09 per cent to 5.13 per cent.

But the lowest rates available have not yet gone up so borrowers able to fix now are advised to do so soon.

Even savings rates are up slightly on one-, three- and five-year fixed-rate bonds. This is because bank swap rates – the rate lenders pay financial institutions for funds – went up in anticipation of the Budget.

Meanwhile, tax rises and higher public spending are expected to boost economic growth by 0.75 percentage points at its peak in a year’s time, relative to previous forecasts published in August.

The Budget is also expected to increase Consumer Prices Index (CPI) inflation by just under 0.5 percentage points in late 2026.

Andrew Bailey said rates were likely to continue to fall gradually (Henry Nicholls/PA Wire)

It means inflation will now reach the Bank’s 2 per cent target in the second quarter of 2027, a year later than it previously projected.

The latest official data showed UK Consumer Prices Index (CPI) inflation fell to 1.7 per cent in September, down from a 41-year high of 11.1 per cent in 2022.

The slowdown in price rises, from 2.2 per cent in August, was driven by a sharp slump in petrol prices and lower air fares.

Mr Bailey said inflation falling below its 2 per cent target meant policymakers had been able to cut rates to their lowest level since June last year.

The minutes from the Monetary Policy Committee’s meeting suggest a further rate cut next month is unlikely, according to Suren Thiru, economics director at the Institute of Chartered Accountants.

“This interest rate cut is a timely boost to both households struggling with their mortgage bills and businesses after a difficult budget,” said Mr Thiru.

There is “significant uncertainty” over the outlook for the jobs market, with businesses set to face a bigger national insurance tax bill and a higher national minimum wage from April, the MPC said.

Tracker mortgage payments are set to fall by an average of £28.98 a month as a result of the base rate cut, analysts say.

According to UK Finance, a borrower on a standard variable rate mortgage will have their monthly payment reduced by £17.17 on average.