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The Bank of England has cut interest rates to 4.75 per cent after inflation fell to a three-year low in September, as it signalled that a further move is unlikely before early 2025.

The Monetary Policy Committee’s eight-to-one decision to cut the base rate by 0.25 percentage points was in line with the expectations of economists polled by Reuters.

The BoE kept rates on hold at its previous meeting in September, following a reduction in August.

“We need to make sure inflation stays close to target, so we can’t cut interest rates too quickly or by too much,” said BoE governor Andrew Bailey on Thursday.

“But if the economy evolves as we expect, it’s likely that interest rates will continue to fall gradually from here,” he added.

The pound strengthened after the decision, up 0.5 per cent on the day against the dollar at $1.294. The 10-year gilt yield was steady at 4.55 per cent.

This week’s decision suggests the BoE is taking a cautious approach to lowering rates as it weighs the impact of chancellor Rachel Reeves’ Budget last week, which loosened fiscal policy.

The outlook has also been affected by Donald Trump’s victory in this week’s US election, particularly because of his support for higher tariffs, which many economists argue could stoke inflation.

The BoE said the Budget would increase consumer price inflation by just under 0.5 percentage points at its peak compared with previous projections, as well as boosting GDP by 0.75 per cent in a year’s time.

The inflation outlook prompted traders to trim their expectations of a further quarter-point cut at the BoE’s next meeting in December from about 30 per cent to about 20 per cent, according to levels implied in swaps markets.

Hussain Mehdi, a strategist at HSBC Asset Management, said he now expected a “fairly shallow easing cycle” that would put upward pressure on bond yields, in part due to the Budget’s impact on inflation.

Inflation hit 1.7 per cent in September, the first time it has dipped below the BoE’s 2 per cent target since 2021, but the central bank expects it to increase in coming quarters.

Partly as a result of the Budget, the BoE considers that inflation will now take longer than previously expected to return to target, reaching 2.2 per cent in two years’ time before falling to 1.8 per cent by the end of the following year.

In an indication of the Budget’s impact on UK businesses, J Sainsbury warned on Thursday that Reeves’ changes would be “inflationary”, as it complained that they would subject it to an “unexpected” and “significant” £140mn “barrage of costs”.

BT also described the Budget as a “new inflationary pressure”, as it said it would now be hit by a £100mn increase in costs.

The Budget unveiled a £40bn increase in taxes, most of which will come from national insurance paid by employers. It also boosted government borrowing by an average of £28bn a year over the course of the parliament as Reeves increases.

The BoE predicted that growth will pick up from 1 per cent this year to 1.5 per cent in 2025, before easing back to 1.25 per cent in 2026.

MILLIONS of mortgage bills are set to fall after the Bank of England confirmed a cut to interest rates.

During today’s meeting of the Monetary Policy Committee (MPC), the BoE’s rate-setters reduced the base rate from 5% to 4.75%.

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The base rate is used by lenders to determine the interest rates offered to customers on savings and borrowing costs including mortgages.

This reduction means that millions of mortgage holders are set to see their bills fall.

It’s only the second cut since 2020 but Brits may now have to wait longer for another rate cut next year because the Budget has raised the risk of inflation remaining higher for the next three years.

Eight of the MPC members voted to cut the base rate versus one who preferred to keep it unchanged.

Bank governor Andrew Bailey said: “Inflation is just below our 2% target and we have been able to cut interest rates again today. 

“We need to make sure inflation stays close to target, so we can’t cut interest rates too quickly or by too much.

“But if the economy evolves as we expect, it’s likely that interest rates will continue to fall gradually from here.”

Mr Bailey’s comments signal that it is very unlikely interest rates will rise again, but they will not be cut in the “aggressive” way he, or markets, had previously expected.

Money markets are now betting interest rates will stay slightly higher for longer but reach 3.5% by the end of next year. 

Interest rates have risen from historic lows of 0.1% in December 2021, and peaked at 5.25% in July 2023, as part of efforts to reduce inflation to the Bank’s 2% target.

This led to a sharp increase in mortgage costs for millions of households, adding thousands of pounds to some bills, though savers saw returns on their savings go up.

The Bank of England made its first cut since 2020 from 5.25% to 5% in August.

The cut came after months of inflation, falling from a record high of 11.1% in October 2022.

Inflation measures how prices for everyday goods like food and clothing have changed compared to last year.

The BoE then held the key rate at 5% in its meeting in September.

Since then, official figures published in October showed that inflation fell to 1.7%, its lowest level since April 2021.

The latest MPC meeting comes after Rachel Reeves announced nearly £70billion in additional spending during her Autumn Statement.

The Office for Budget Responsibility (OBR) indicated that this sharp increase in spending will contribute to higher inflation in the coming months, although it will also help drive stronger economic growth.

It forecasts that inflation will average 2.5% this year and 2.6% next year before decreasing, assuming the Bank of England takes action to help bring it to the target rate.

Investors were unsettled by the watchdog’s warning, leading economists to predict fewer rate cuts than previously anticipated for next year.

Last Thursday, bond traders drove up the interest rates, known as gilt yields, on 10-year government bonds to 4.56%, a move that temporarily caused mortgage rates to spike.

Markets are pricing fewer than four quarter-point cuts up to the end of 2025, down from a little under five prior to the Budget.

Despite this, today’s rate cut brings good news for borrowers, including homeowners, who may benefit from a reduction in mortgage rates.

House prices hit an all-time high, new data out today reveals off the back of falling rates.

Chancellor Rachel Reeves said: “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 mMini-budget.

“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.”

However, a cut to the base rate also means that savers might experience a decrease in the interest earned on their savings.

Here, we explain what today’s rate drop means for your finances.

MORTGAGES

When interest rates fall, mortgage rates typically follow suit.

That’s because the base rate is used by lenders to set the interest rates they offer customers on savings and borrowing, including mortgages.

However, the timing of when you will see the reduction depends on the type of home loan you have.

Those on tracker and standard variable rate (SVR) mortgages usually experience an immediate change in payments, or very shortly after.

There are 643,000 customers on tracker mortgages and 624,000 on SVRs.

According to TotallyMoney, today’s 0.25% rate cut will save homeowners with an average tracker mortgage £32 a month or £382 a year.

The average standard variable tariff rate is 7.95%, although these are among the priciest rates on the market.

However, those on fixed-rate mortgages won’t see any changes until their deals end and they take out a new one.

Most mortgage holders, almost 7million, are on fixed deals.

Around 800,000 homeowners a year with a mortgage rate below 3% will have to refinance at a higher rate and still face a sharp jump in monthly costs. 

When rates surged above 6%, borrowers on fixed-rate deals encountered substantial mortgage payment hikes upon remortgaging.

Higher fixed rates also made it more challenging for first-time buyers to enter the property market.

However, the average two-year fixed-rate deal is continuing to decline.

According to MoneyFactsCompare.co.uk, a typical two-year fixed rate in November 2022 was 6.47%, but it has now fallen to 5.39%.

Unfortunately, brokers do not think rates will ever return to record lows of 1 or 2%. 

Rachel Springall, finance expert at MoneyFactsCompare.co.uk, said: “Borrowers who are due to come off a cheap fixed rate deal will be on tenterhooks for mortgage rates to drop before they refinance, but if they have some months ahead to wait, it may be wise to consider overpaying.

“Over the course of the past 12 months, mortgage rates have been coming down and the average two-year fixed rate has dropped by almost 1%.

“The incentive to switch away from a SVR remains prevalent, as on average the rate sits just shy of 8%.

“A typical mortgage being charged the current average SVR of 7.95% would be paying £403 more per month, compared to a typical two-year fixed rate.”

David Hollingworth, associate director at L&C Mortgages added: “There are still some extremely sharp rates on offer with some rates still available below 4% but these are bound to be feeling the pressure. 

“Applying for a deal will secure the rate and avoid any further increases. 

“At the same time they can still review the deal if rates do subsequently drop back.”

How to get the best deal on your mortgage

IF you’re looking for a traditional type of mortgage, getting the best rates depends entirely on what’s available at any given time.

There are several ways to land the best deal.

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Usually the larger the deposit you have the lower the rate you can get.

If you’re remortgaging and your loan-to-value ratio (LTV) has changed, you’ll get access to better rates than before.

Your LTV will go down if your outstanding mortgage is lower and/or your home’s value is higher.

A change to your credit score or a better salary could also help you access better rates.

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And if you’re nearing the end of a fixed deal soon it’s worth looking for new deals now.

You can lock in current deals sometimes up to six months before your current deal ends.

Leaving a fixed deal early will usually come with an early exit fee, so you want to avoid this extra cost.

But depending on the cost and how much you could save by switching versus sticking, it could be worth paying to leave the deal – but compare the costs first.

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To find the best deal use a mortgage comparison tool to see what’s available.

You can also go to a mortgage broker who can compare a much larger range of deals for you.

Some will charge an extra fee but there are plenty who give advice for free and get paid only on commission from the lender.

You’ll also need to factor in fees for the mortgage, though some have no fees at all.

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You can add the fee – sometimes more than £1,000 – to the cost of the mortgage, but be aware that means you’ll pay interest on it and so will cost more in the long term.

You can use a mortgage calculator to see how much you could borrow.

Remember you’ll have to pass the lender’s strict eligibility criteria too, which will include affordability checks and looking at your credit file.

You may also need to provide documents such as utility bills, proof of benefits, your last three month’s payslips, passports and bank statements.

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CREDIT CARDS AND LOANS

When the base rate is lowered, the cost of borrowing through loans, credit cards and overdrafts can also fall.

However, certain loans, such as personal loans or car financing, usually stay the same, as you have already agreed on a rate.

Lower interest rates can result in reduced annual percentage rates (APRs) on credit cards, making it more affordable to carry a balance.

However, it’s important to remember that multiple factors influence credit card rates, and not all lenders may fully pass on the benefits of the rate cut.

Your lender will let you know before making any changes. 

SAVINGS RATES

Savers have been the primary beneficiaries of rising interest rates.

This is because banks often compete to offer market-leading rates, although they can be slower to pass these benefits on to customers.

However, falling interest rates spell bad news for those with savings.

Banks and building societies have already been preparing for future rate cuts and have started cutting rates in recent months.

According to Moneyfacts, the average easy-access savings account rate in November 2023 was 3.19%, compared to 3.03% today – down from 3.15% in August.

Not all savings account rates will fall immediately, though, so you could still lock in a good deal now.

Holly Tomlinson, financial planner at Quilter, said: “Currently, there are still some accounts paying as much as 7%.

“These won’t be around for long so having a careful look at your finances sooner rather than later is worthwhile.”

Analysis by Shawbrook Bank suggests there are 1.4million savers with fixed deals ending before January.

According to Adam Thrower, the bank’s head of savings, failing to switch accounts now “could be costly” for these savers.

However, ensure that you withdraw your cash only at the end of your fixed term. Otherwise, you will incur a penalty.

You can shop around for the best savings rates by using price comparison sites like Compare the Market, Go Compare, and MoneySuperMarket.

PENSIONS

The BoE’s base rate also impacts pensioners looking to buy an annuity.

A pension annuity converts your pension pot into a guaranteed regular income for the rest of your life.

However, because annuity rates are linked to the cost of government borrowing, any rise or fall in the BoE’s base rate can impact the rate you receive.

The income you receive can be locked in on the day you purchase your annuity, so current annuity rates can make a big difference to your long-term financial security.

However, Holly Tomlinson added: “Reducing the base rate may lead to lower bond yields, potentially resulting in less favourable annuity rates for retirees.

“Those nearing retirement should consult with a financial adviser to assess the timing of annuity purchases and explore other retirement income options.”

We’ve previously explained how to ensure you get the best deal for your retirement.

THE busiest airport in the UK has a massive passenger terminal – that holidaymakers can’t actually use.

London Heathrow passengers may have realised there there are five terminals, but no access to T1.

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This is because it was replaced by T2, called The Queen‘s Terminal, which opened in 2014, primarily for short-haul flights.

T1 opened in 1968 to passengers, followed by a formal opening by Queen Elizabeth II in 1969.

The record-breaking terminal was the largest of its kind when it opened, being the biggest short-haul terminal in Western Europe.

It was then massively redeveloped in 2005, doubling the size of the lounge.

However, the terminal closed in 2015, while Terminal 2 was being expanded.

Most airlines were diverted to other terminals, with the last to leave being British Airways.

It has since never reopened to passengers, now being left empty and mainly used for training and baggage.

The London Heathrow website explains: “A number of emergency service teams, such as the London Fire Brigade, the Ambulance Service, and the Met Police, use various areas in the building for training sessions.

“[But] the main functionality of Terminal 1, however, is to house the baggage system for Terminal 2.

“All of the baggage teams stayed in Terminal 1 as their main base, and all of the bags that are checked into Terminal 2 are processed in the T1 building.

“Any disrupted bags that get processed are bought to the ‘purge area’, which is the old international reclaim hall in Terminal 1, and stored there until they are cleared.”

The terminal could one day be demolished, the airport also said.

It added: “There may be future plans to one day get rid of the building in its entirety to make space for the further expansion of Terminal 2.”

In the mean time, there are four terminal passengers can use at London Heathrow Airport.

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Terminal 3, opened as the Oceanic Terminal, launched in 1961 for long-haul flights to the US and Asia and was home to the UK’s first moving walkway.

This was followed by Terminal 4 in 1986, with the majority of flights to the Middle East and North Africa.

And the £4.3billion Terminal 5 opened in 2008, also opened by Queen Elizabeth II and is only used by British Airways.

London Heathrow welcomed 61.6million passengers last year, making it the biggest and busiest in the UK.

The airport has put forward a number of expansion plans, including a third runway and extra infrastructure with estimated costs in the billions.

Elsewhere in the UK, Bristol Airport once flew to New York.

Sadly this hasn’t been the case for 10 years with the majority of flights now being short-haul.

And we were one of the first to try our Manchester Airport’s new private terminal – here’s our verdict.

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India’s economy has been among the fastest growing in the world. In the previous financial year ended March 2024, it surged 8.2 per cent, exceeding estimates. Most expect the economy to grow strongly this financial year too. According to the Reserve Bank’s projections, the GDP will grow 7.2 per cent this year. However, recent data trends are presenting a mixed picture, making one wonder if a slowdown is around the corner.

“There is some incipient pressure evident on the domestic economy,” warns the latest report by the State Bank of India’s research department.

It expects India’s GDP to have clocked a growth of around 6.5 per cent in the July-September quarter, which, along with the third and fourth quarter numbers, could push the overall financial year 2025 GDP growth closer to 7 per cent.

Soumya Kanti Ghosh, group chief economic adviser at SBI, pointed out that several high-frequency indicators signalled that aggregate demand continued to grow, albeit with a slower momentum than in the preceding quarters and painting a somewhat mixed picture.

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For instance, domestic passenger vehicle sales, which is an indicator of urban demand as well as other indicators of consumption and demand such as diesel consumption, electricity demand and bitumen consumption, have eased, he noted. But, at the same time, transport and communication indicators like passenger and freight traffic at airports and toll collection are showing traction.

SBI’s research department tracks around 50 leading indicators in consumption and demand, agriculture, industry, service, and other indicators.

The section of indicators showing acceleration declined to 69 per cent in the second quarter of FY2025 versus 80 per cent in the year-ago second quarter and 78 per cent in the first quarter of this financial year. Ghosh believes it could well be a temporary impasse with the narrative changing from the third quarter onwards.

What will be comforting for policymakers is that rural demand is recovering, tractor sales jumped in October, rural agri wage growth accelerated in August, and two-wheeler and three-wheeler sales continue to show consistent growth, noted Ghosh.

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The report pointed out that every month in the first half of this year, rural consumer sentiment was over 100 and gradually converged to that of urban consumer sentiment.

“The recent buoyancy in rural demand/ consumption, juxtaposed against the somewhat declining urban demand/ consumption, with 85 per cent of rural indicators showing acceleration as against 73 per cent of urban indicators could be indicative of shifting contours of urban demographics, marked preferences to quick commerce outweighing consumption decisions to some extents,” he felt.

A higher consumer sentiment in rural areas will lead to higher consumer spending, supporting rural markets, job creation and income generation, the report argued.

The SBI report reiterated that governments should refrain from policy mistakes. It continues to believe that farm loan waivers have been a “self-inflicted harakiri” that distorted the credit culture of borrowers and “not even marginally serving” the purpose in the medium to long term. Similarly, it argued that only MSP (minimum support price) driven agriculture growth is more “fiscally extravagant” and results in extreme groundwater depletion.

The German car industry has long been seen as a metaphor for the state of Europe’s largest economy. The recent announcement by Volkswagen, the country’s biggest carmaker, that it plans to close plants and lay-off workers, has quickly become a symbol of Germany’s current political and economic malaise — and its ever dimming future.

Volkswagen — founded by the Nazis, later a symbol of Germany’s postwar economic miracle — is no stranger to scandal and strategic mis-steps. Its corporate misbehaviour, manipulating exhaust data in the diesel scandal, and then its shortsighted neglect of electric cars, now provides a case study of how everything German messed up. The German legend has become a German albatross.

The car industry plays a central role in Kaput, Wolfgang Münchau’s eloquent and comprehensive deconstruction of the German model. “I am not peddling a conspiracy theory when I say that the car industry is running Germany,” is his dramatic verdict on the impact of the automobile. And, “when the industry starts to decline, so will the country.”

As if on cue, since the book went to press, Intel’s plan to build a semiconductor facility, in eastern Magdeburg, subsidised by the German taxpayer to the tune of €10bn, stalled because it involved building the wrong kind of semiconductor. In the western Saarland, a semiconductor factory planned by Wolfspeed and the German automotive supplier ZF has also been postponed. Now the German export economy faces a renewed onslaught from a second Trump administration, and the government too is tearing itself apart with disputes about the right economic response. The bad news keeps on coming.

Münchau, a former FT columnist, paints a picture of an economy, political system, and society dysfunctional to the point of being terminally broken, ie kaput. Germany faces a choice, but is unable to summon the political and intellectual resources to make any decisive response.

This extends beyond the boardroom and factory floor. After Russia’s full-scale invasion of Ukraine shook all the assumptions of the old German foreign policy, Chancellor Olaf Scholz announced a complete rethink of his country’s basic model to suit a new age of geopolitics. It was, Scholz proclaimed, a Zeitenwende, or epochal turning point. Münchau is rightly sceptical and sees that as mostly rhetorical, smoke and mirrors.

What has gone wrong has an economic root, but is above all the product of a long-term political culture

His tale is entertainingly interspersed with personal stories of inadequacies, from poor or absent mobile telephony capacity, the anti-technical bias of school education (and more generally of German culture), the lagging universities, the unwieldiness of public bureaucracy, and a poor capacity to make use of the resources and skills brought by immigrants.

Münchau starts with “dodgy banks,” including another German icon, Deutsche Bank, but also the once powerful state-owned banks (“a slush fund to circumvent taxpayers”), then takes an automobile drive (taking in along the way “friends of Gerhard”, a clique of business pals of the former chancellor), before excoriating economic appeasement of Russia and China. Angela Merkel’s neo-mercantilism, when German exports “took off like never before,” provided an export vent to compensate for low investment during her 16-year chancellorship. The notorious debt-brake that limited public expenditure, including investment, has now become the cause of the collapse of the coalition government.

Although Schröder is lacerated, and Merkel mocked, no political figure emerges unscathed from Münchau’s diagnosis of a truly systemic problem. Thus “Neo-mercantilism is not a policy. It is a system. And everyone in Germany was supporting it.” Economic interests shaped the political culture, and no political party escaped, or could escape.

The two major political parties, the Christian Democrats and the Social Democrats, are equally guilty. The small, liberal Free Democratic party is obsessed with a fiscal rule that restricts public investment. Meanwhile, the Greens drove a senseless push to exit clean atomic energy that left Germany more dependent on carbon energy and on dirty coal. Nobody questioned the basic industrial model.

And Germany, Münchau argues, is ruining the EU. At the moment when Mario Draghi, the former ECB head, produced an important report on European competitiveness that emphasised, as does Münchau, the need for a capital markets union, Berlin pushed back ferociously against the attempt of the Italian bank UniCredit trying to take over Germany’s second-largest lender, Commerzbank. A new German hostility to technology is poisoning EU strategy, notably in AI regulation, where the EU is “delusional to think of itself as a global regulator in an area in which it has no experience”.   

What an indictment! Yet Germany was once a model, in the 19th century when it dominated scientific and industrial advance, but also recently when a commitment to workers’ rights and job security looked more appealing than the ruthless US version of capitalism. In the wake of the 2008 financial crisis, John Kampfner’s Why the Germans Do It Better (2020) gave us an overly rosy analysis of how the postwar wunderkind had grown into a mature country, with a harmonious corporate model, good labour relations, an appreciation of leisure and a high degree of tolerance. That was only a few years ago, but now everything appears changed.

What has gone wrong has an economic root, but is above all the product of a long-term political culture. The economic cause is the same story as the past triumphs when a focus on high-quality engineering was exemplified by the automobile. Improvements occurred through incremental tweaks, not through radical rethinking. There was no Schumpeterian creative destruction.

Not all the German story is as bleak as Münchau suggests. Is terrible industrial devastation always needed for rebirth and new development, or does incrementalism have some role? An often reported story, not presented by Münchau, takes the case of BioNTech’s miracle mRNA vaccine that is now being applied to the treatment of common cancers. BioNTech’s entrepreneurs were Uğur Şahin, born in Turkey, whose father came to Germany to work in the Ford automobile works, and his wife Özlem Türeci, born in Germany, to a surgeon of Turkish origin.

Despite the rise of the radical right Alternative for Germany party, which is not likely ever to be in power at the federal level, and notwithstanding horrifying incidents of political violence, most of Germany is still a civilised and decent place to live. There are still areas of scientific excellence; and also areas where immigrants play a transformative role. 

It is also difficult to imagine a large advanced industrial country that might serve as a better model. Britain or the US, with deeply dysfunctional politics? The Volkswagen story has a neat parallel in the travails of the American icon Boeing.

And ultimately, what will happen to Germany? The model of focusing on powerful export industries is German, but as Münchau acknowledges not uniquely so. This is the story of Japan, but also of modern China, and China is becoming the testing ground for the German model. China is replacing Germany, as the world’s manufacturing and export dynamo, because it was able to leapfrog to new technologies, notably in electric vehicles. There is also political capture there, leading to a neglect of new technologies.

What happens when the growth models collapse? Japan after the bubble burst in the 1990s, with an ever more striking ageing problem, had very slow growth, but no political or social, let alone a civilisational collapse. It still plays an important foreign policy role, and it still leads in some areas of design. Maturing is not the same thing as sudden death. A future Münchau may write a parallel analysis of Chinese stagnation, where the political fallout is likely to be much more destructive. The EU provides a protective framework for a broken wunderkind, and there is dynamism elsewhere, notably to the north and to the east, where the likes of Denmark and Poland have become the new economic exemplar.

Kaput: The End of the German Miracle by Wolfgang Münchau Swift Press £20, 256 pages

Harold James is the author of ‘Seven Crashes: The Economic Crises That Shaped Globalization’

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