Why have interest rates been cut, and what does it mean?

The Bank of England has cut interest rates for the second time in four months, after inflation fell back to normal levels earlier this year.

Rates had been at 5% after policymakers previously cut them over the summer – on Thursday they came down again.

Here the PA news agency looks at what the decision means and what the Bank expects to happen to the economy.

The Bank of England’s Monetary Policy Committee (MPC) reduced the base interest rate to 4.75%, a quarter-point cut.

It is the second time interest rates have come down this year, following a period of higher borrowing costs amid skyrocketing inflation in 2022 and 2023.

Eight of the Bank’s Monetary Policy Committee members voted in favour of cutting the base rate, versus one who preferred to keep it unchanged.

The base rate helps dictate how expensive it is to take out a mortgage or a loan.

Hikes in recent years have left mortgage rates much higher than was normal for most of the last decade.

But the latest cut is unlikely to push mortgage rates down immediately because it was “almost fully priced in” by providers, according to Laith Khalaf, an analyst at investment firm AJ Bell.

In fact, the impact of past interest rate hikes is still leading to higher borrowing costs for existing mortgage holders.

Around 800,000 fixed-rate mortgages with an interest rate of 3% or below are expected to be refinanced per year, on average, until the end of 2027.

But variable mortgages “should fall back” as a result of the cut, Mr Khalaf added.

The base rate also dictates the interest rates offered by banks on savings accounts, meaning these are likely to fall.

Raising interest rates is the central bank’s main way of reducing inflation – the measure of how fast prices increase over time.

The main inflation figure, which covers the whole economy, fell to 1.7% in September, below the Bank’s 2% target, which prompted the rate cut.

But inflation is expected to rise again towards the end of this year, as energy costs go up over the winter.

Inflation is also expected to stay higher for longer than previously forecast following spending and tax rises announced in Labour’s autumn Budget, the Bank said.

The MPC, which makes rate decisions, is due to meet once more this year, and most experts think they will not cut rates.

Mr Bailey reiterated his call for rates to fall “gradually”, saying the Bank should not cut “too quickly or by too much”.

Sarah Coles of investing platform Hargreaves Lansdown said: “The Bank of England has delivered one more cut for the road before it’s widely expected to shut up shop for a while and wait for the dust to settle.”

She pointed to more borrowing in the Budget, a rise in the minimum wage and an increase to employer National Insurance contributions as the reasons, which were all cited in the Bank’s latest report as potentially pushing inflation up.

Rachel Reeves said the interest rate cut would be “welcome news” for millions of families but that households are still facing a challenge after Liz Truss’ mini-budget.

“Today’s interest rate cut will be welcome news for millions of families, but I am under no illusion about the scale of the challenge facing households after the previous Government’s mini-budget,” the Chancellor said.

“This Government’s first Budget has set out how we are taking the long-term decisions to fix the foundations to deliver change by investing in the NHS and rebuilding Britain while ensuring working people don’t face higher taxes in their payslips.”

Mortgage rates are still high, but a cut to the base rate is good news for the housing market. It also indicates that the Bank thinks inflation is under control.

That is a small positive for consumers, as it means prices on everyday shopping items are rising slower than before.

The Bank’s latest economic report also indicated that economic growth will be stronger than previous estimates next year, partly because of the extra spending and borrowing laid out in the Budget.

Mr Bailey said falling inflation “not only continues but actually has been faster than we expected, and that’s good and encouraging.”

Donald Trump’s victory in the US election this week brings with it the threat of trade tariffs, a key policy he has touted.

Many experts think Mr Trump’s policies could ultimately contribute to rising inflation in the UK.

Mr Bailey said he would “work very closely” with the US administration but refused to speculate over potential Trump policies.

He said: “Let’s wait and see where things get to. I’m not going to prejudge what might happen, what might not happen, where policy goes.”

Mr Bailey added: “I do think we have to watch very carefully the fragmentation of the world economy. I will say that.”