UK interest rates cut for the first time in four years

The Bank of England has cut interest rates to 5% from 5.25%, marking the first reduction since March 2020. 

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This decision, while offering some immediate relief to homeowners with variable-rate mortgages, suggests that borrowing costs are unlikely to fall significantly in the near future.

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The rate cut means that homeowners with variable-rate mortgages will see a reduction in their monthly payments, but savers may face lower returns. High Street banks and lenders will adjust the cost of borrowing for mortgages and credit cards accordingly.

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The Bank's cautious approach is driven by the need to maintain low inflation, which currently stands at the target of 2%. 

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However, core inflation, which excludes volatile items like food and fuel, remains high, and inflation is expected to rise in the second half of the year due to increasing energy costs.

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The Bank of England has also upgraded its GDP growth forecast for the second quarter to 0.7%, up from 0.2%. 

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Although wage growth has slowed, reducing one inflationary pressure, it continues to be monitored. The recent public sector pay rise is not expected to have a major impact on inflation.

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Economists caution against expecting a rapid decline in borrowing costs. A significant portion of mortgage holders with fixed rates below 3% may still face challenges as their deals expire. 

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The Bank's measured approach highlights the delicate balance it must maintain between fostering economic growth and controlling inflation. 

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As energy prices are expected to rise in the colder months, and with the potential for wage growth to contribute to inflation, the Bank signals that further rate cuts or significant changes in borrowing costs are unlikely in the immediate future. This approach aims to ensure long-term economic health and stability.