Base rate cut to 4% – what it means for your mortgage, savings and more

Why the base rate was cut

The Bank's Monetary Policy Committee (MPC), which determines the rate, voted by a majority of five to four to cut the rate to 4% (four members voted to hold the rate at 4.25%).

The base rate is used by the Bank of England as a tool to control inflation (the rate at which prices rise). In very simple terms, the theory is that higher interest rates mean people spend less on non-essentials – and when overall spending in the economy falls, price rises slow down.

The Bank has a target – set by the Government – of 2% for the Consumer Prices Index (CPI) measure of inflation. The latest figures show that CPI inflation rose to 3.6% in the 12 months to June this year, up from 3.4% in May – above the Bank's target of 2%.

Commenting on this latest decision, the Bank said there had been "substantial disinflation over the past two and a half years", adding that inflation was expected to fall back towards its 2% target after September. It's the third time the base rate has been cut this year. In January, the rate stood at 4.75%.

On the factors at play in the Bank's decision, Laith Khalaf, head of investment analysis at investment platform AJ Bell, said: "It might seem odd for the Bank of England to be cutting interest rates at the same time that inflation is pulling away from the 2% target.

"However, the Bank's actions are based not on the current inflation rate, which tells us about price rises over the last 12 months, but rather on future inflation, forecast over the next three years. Importantly, the Bank of England's previous forecasts show inflation rising over the course of this year before falling back, so prices are currently evolving broadly in line with what the Bank has been expecting."

What the base rate cut means for your money

The base rate is used by the central bank to charge other banks and lenders when they borrow money – so it influences what borrowers pay and what savers earn. Here's what you need to know in brief...

Mortgages

• If you're on a fix, there's no change until your fix ends. Rates on new fixed deals may drop a bit, but this base rate cut was expected so it has mostly already been factored in to what lenders are offering.
  
  David Hollingworth, of mortgage broker L&C Mortgages, said: "A rate cut was widely expected and markets expect that there could be more to come this year. Fixed rates will therefore have priced in the latest cut and borrowers expecting to see a sharp dip in rates are likely to be disappointed."

• If you're on a tracker, your rate will drop by 0.25 percentage points. The reduction is equivalent to roughly £15 a month lower repayments per £100,000 of mortgage debt.

• If you're on a variable rate, this will likely drop by up to 0.25 percentage points. It could be a bit less depending on the lender and the exact mortgage you have.

• We'll be asking all major lenders when they plan to cut their tracker and variable rates. We'll publish a lender-by-lender breakdown when we know more.

Savings

Variable rate savings – mainly easy-access accounts – will likely drop within two to four weeks by 0.25 percentage points.

Fixed-rate savings have already factored in some of this cut, but they may come down further. If you have money you can lock away, you want rate certainty and you're considering fixing, the safest bet is to do so today (Thursday 7 August).

Either way, don't settle for less than 4% interest – see Martin's Savings Masterclass for help maximising your interest (the exact rates Martin mentions may have changed slightly since the last update on Tuesday 5 August, but the principles still apply).

Credit cards

Credit cards are mostly unaffected as their interest rates are already significantly above the base rate – with the average interest rate for purchases now at 35.7% APR, according to comparison service Moneyfacts.

If you're paying credit card interest, check if you can save £1,000s by shifting the debt to 0% using a balance transfer card.

Loans

Existing loans are unaffected as they're usually fixed rates. New loan rates are typically set on interest rate forecasts rather than base rate moves, but the cheapest new loan rates could come down very marginally.