Bank of England Governor Andrew Bailey has hinted that interest rates could be reduced more quickly if inflation stays under control.
In an interview with The Guardian, Bailey suggested the Bank might take a more aggressive approach to lowering borrowing costs, contingent on inflation trends.
In August, the Bank reduced interest rates from 5.25% to 5%, marking the first rate cut in over four years. Bailey stressed the importance of monitoring inflation, which has been a key factor in the Bank’s decisions. He noted that developments in the Middle East, particularly any changes in oil prices, could potentially drive inflation higher, and the Bank is watching the situation closely.
With only two meetings remaining this year, in November and December, the Bank’s future rate decisions are in focus. At the September meeting, Bailey was hopeful that borrowing costs would continue to fall, though he emphasised that keeping inflation low is crucial.
Interest rates have been steadily increased since the end of 2021, as inflation surged in part due to rising energy prices following Russia’s invasion of Ukraine. Now, with inflation nearing the Bank’s 2% target, the focus has shifted to how quickly and how often rates will be reduced.
Lower interest rates would ease mortgage payments for households with variable-rate mortgages tied to the Bank of England’s base rate. However, those with fixed-rate mortgages won’t see an immediate impact. On the flip side, savers are likely to see reduced returns on their deposits as interest rates fall.
While many analysts had already predicted a rate cut in November, Bailey’s comments have raised expectations of an additional reduction in December. The pound reacted to the news by falling nearly 1% against the dollar, with investors anticipating lower returns on UK assets as interest rates decline. Richard Worrall, NAVA Propertymark, said:
“The Bank of England cutting interest rates should help stimulate growth in the housing market, which is fantastic news for those who are hoping to purchase their next home. However, if the Chancellor increases the higher rate of Capital Gains Tax, this could reduce the number of property transactions on the market at a time when full confidence needs to be restored to the housing market, especially when encouraging housing growth is a central part of the new UK Government’s mission.”
