Base rate frozen at 5.25% as inflation set to hit target by end of 2025

Base rate frozen at 5.25% as inflation set to hit target by end of 2025
Paloma Kubiak
Written By:
Paloma Kubiak

The Bank of England has held the base rate at 5.25% for the second time in a row, as forecast by industry experts.

The Bank’s Monetary Policy Committee (MPC) voted by a 6-3 majority to maintain the base rate at 5.25%. Three members preferred to increase it by 0.25 percentage points to 5.5%.

The move was widely predicted, with experts now suggesting they may have peaked.

It follows on from inflation in the year to September recording a ‘sticky’ 6.7%, while the UK economy is estimated to have grown by 0.2% in August, resisting a technical recession once more.

Elsewhere, policymakers have had to contend with higher wage growth of 7.8% in the three months to August, meaning it now exceeds the rate of inflation.

The MPC noted that the market-implied path for the bank rate remains at 5.25% until Q3 2024 then declines gradually to 4.25% by the end of 2026, “a lower profile than underpinned the August projections”.

UK GDP is expected to have been flat in Q3 2023, weaker than projected in August, while the events in the Middle East have led the oil futures curve to rise, gas futures prices are little changed.

Elsewhere, the loosening labour market and the high pay growth figures are also being monitored closely. The committee noted: “There remains uncertainty about the near-term path of pay, but wage growth is nonetheless projected to decline in coming quarters from these elevated levels.”

Inflation is lower than earlier predictions, but remains well above the 2% target. However, it is expected to continue to fall sharply, to 4.75% in Q4 2023, 4.5% in Q1 2024 and 3.75% in Q2 2024.

“This decline is expected to be accounted for by lower energy, core goods and food price inflation and, beyond January, by some fall in services inflation,” the MPC wrote.

It added that inflation is expected to hit its 2% target by the end of 2025, falling to 1.6% in three years’ time.


What does this mean for borrowers?

According to the latest figures from UK Finance (December 2022), an estimated 800,000 fixed rate mortgage deals (out of 6.8 million holders) are set to mature in the second half of this year. More than 770,000 borrowers are currently on their lender’s standard variable rate while 639,000 are on a variable tracker rate.

Chris Flower, chartered financial planner at Quilter, said: “For current and prospective homeowners, a further hold on interest rates will offer somewhat of a mixed bag. Those on variable rate mortgages will not see an immediate increase in their monthly payments, and the stability will provide further reprieve for borrowers – particularly those who may have been concerned about rising costs. The housing market is currently in a deep freeze and while a hold in rates is certainly not bad news, it’s probably not going to thaw it out any time soon.

“However, if rate stability helps people begin to feel more financially secure, then house prices may drop less quickly than first feared, as more competition helps to prop up prices.

“For those looking to remortgage or take out a new mortgage, lenders appear to be remaining very strict with their criteria. Though fixed rates have lowered slightly, new borrowers or those looking to switch may not yet see significant reductions, but things are beginning to move in the right direction. After all, lenders are commercial entities which compete for custom, so we may see price wars which could help to push rates down further in the coming months.”

Alastair Douglas, CEO of TotallyMoney, said some homeowners haven’t yet felt the brunt of the previous hikes, and “will be in for a shock when their fixed rate deal comes to an end”.

He said: “Mortgage defaults are already rising at the fastest pace since 2009, and if you’re struggling to keep up with payments, then get in touch with your lender as soon as possible. The Financial Conduct Authority has ordered banks to put their customers’ needs first, and this means you could move to reduced monthly payments, or extend the term of your deal.

“Remember that this won’t negatively impact your credit rating. However, missed payments can — and they could stay on your credit file for up to six years. If these persist, you might end up in mortgage arrears, leading to court action and even repossession.”