Millions of British homeowners are bracing for what could be the most consequential monetary policy decision of the year, as the Bank of England’s Monetary Policy Committee prepares to meet in early August against a backdrop of cooling inflation and an economy that, for the first time in years, appears to be growing at a sustainable pace.
The Consumer Prices Index rose by 2.3 per cent in the twelve months to June, the lowest reading in over two years and tantalisingly close to the Bank’s 2 per cent target. Core inflation, which strips out volatile energy and food prices, has eased to 2.8 per cent. Wage growth, once a primary concern for rate-setters worried about a price-spiral, has moderated to 4.5 per cent, still above the pre-pandemic norm but no longer outpacing productivity gains.
The question facing the nine-member MPC is not whether rates will come down, but how quickly and by how much. The Bank Rate currently stands at 4.25 per cent, having been cut twice from its peak of 5.25 per cent earlier in the cycle. Financial markets are pricing in a near-certainty of a quarter-point reduction to 4.0 per cent at the August meeting, with a second cut to 3.75 per cent possible before the end of the year if the inflation trajectory continues its gentle descent.
For the estimated 1.8 million households on tracker or standard variable-rate mortgages, a cut would translate into an immediate reduction in monthly payments. A typical two-year tracker mortgage of £250,000 would see monthly repayments fall by roughly £30 following a quarter-point cut — modest in isolation, but meaningful when compounded over the course of a year and combined with the broader easing in living costs.
The larger cohort of fixed-rate borrowers will feel the effects more gradually, but the direction of travel is equally significant. The average two-year fixed mortgage rate has already fallen from its 2023 peak of over 6 per cent to around 4.4 per cent, and lenders are competing aggressively for business as the prospect of further cuts emboldens borrowers to remortgage. Several major banks have launched sub-4 per cent deals in recent weeks, the first time such rates have been available since the autumn of 2022.
