Interest rates have been cut for the first time in more than four years, but the Bank of England has warned people not to expect a sharp fall in borrowing costs in the coming months.
In a closely-run decision, rates were lowered to 5% from 5.25% on Thursday, marking the first cut since the start of the pandemic in March 2020.
Interest rates dictate the cost of borrowing set by High Street banks and money lenders for the likes of mortgages and credit cards.
Andrew Bailey, governor of the Bank of England, said policymakers needed "to make sure inflation stays low and be careful not to cut interest rates too quickly or by too much”.
Interest rates have climbed over the last few years, as the Bank has battled to control soaring price rises.
The higher rates have put pressure on household finances, although returns for savers have improved.
The fall to 5% means that homeowners on variable rate "tracker" mortgages will see an immediate reduction in their monthly mortgage payments.
But many homeowners on fixed rate mortgages still face the prospect of much higher mortgage rates when those deals expire over the next few years.
'People are restricted with what they spend'
There are hopes that falling interest rates will improve consumer confidence, which has been subdued of late.
Rupali Wagh, co-owner of Tukka Tuk street food in The Cardiff Market, an interest rate cut would be good for business as customers would have more disposable income.
While business has picked up recently because of the hotter weather, some customers were still ordering less and trying fewer things from the menu.
"They’re very restricted with what they spend. I have never had so many conversations on the table about mortgages and expenses," she said.
'One and done?'
Commenting on the decision to lower rates, Mr Bailey said: “Inflationary pressures have eased enough that we’ve been able to cut interest rates today.”
But he struck a note of caution against expectations there would be a rapid fall in borrowing costs.
Mr Bailey was later asked by reporters if the interest rate cut was “one and done” - that is - will there be no more cuts after this?
He responded by saying he has no view on path of rates and that the Bank would decide from meeting to meeting.
The decision by the Bank’s nine-member committee was finely balanced - five, including governor Andrew Bailey, voted for a quarter point cut.
The Bank’s chief economist Huw Pill was in the minority of four who voted to hold interest rates.
The interest rate cut will be a boost for some homeowners, but the Bank of England signalled that a mortgage shock still lay ahead for others.
Around a third of people with a fixed-rate mortgage are still paying less than 3%, after getting a deal when interest rates were a great deal lower.
The Bank said that most of these home loans will expire before the end of 2026 “meaning that effective interest rates will rise somewhat further over that period”.
The inflation rate - which measures the pace of price rises for goods and services - hit the Bank’s 2% target in May and has remained there.
But core inflation, which strips out volatile elements such as food and fuel prices, remains relatively high. And the Bank expects inflation to rise in the second half of this year as energy bills tick higher in the colder months.
The Bank noted that wage growth - which can worsen inflation - had slowed but committee members continued to monitor it.
The Bank does not, however, expect a recent public sector pay rise promised by Chancellor Rachel Reeves to have a major impact on inflation.
Chancellor Rachel Reeves confirmed offers of wage increases of between 5% and 6% for public sector staff including NHS workers and teachers on Monday.
Ms Reeves said the Bank's decision to cut rates was "welcome", but added that "millions of families" still faced higher mortgage rates because of former Prime Minister Liz Truss's mini-budget.
She added that the government was "taking the difficult decisions" to fix the economy after "years of low growth".
But Conservative former prime minister Rishi Sunak said on X that Labour's "inflation-busting public sector pay rises" would put further interest rate cuts at risk.
UK growth forecast upgraded
On Monday, Ms Reeves claimed the Conservative government had left a £22bn "black hole" in public finances and had attempted to cover it up.
The Tories have rejected this, claiming Labour is laying the groundwork for tax rises at the Budget on 30 October.
The Bank confirmed that it had been briefed by the Treasury about the figures on Monday before Ms Reeves made her statement in the House of Commons.
It said that it was too late to include any effect from Ms Reeves’ announcement on Monday - when she also scrapped a number of public spending projects - in its Monetary Policy Report.
Otherwise known as the Bank’s inflation report, it sets out growth forecasts for the UK economy and is published four times a year.
The Bank upgraded its outlook for the UK’s economic growth this year. It now expects output, or gross domestic product (GDP), to grow by 1.25%, up from its estimate of 0.5% in May.
However, it said economic activity was likely to slow next year in line with previous forecasts, as businesses reported weaker momentum.
