The Bank of England has today cut the base interest rate by 0.25% to 3.75%, its lowest level in nearly three years.

News that the inflation rate fell further than expected yesterday to 3.2% probably influenced decision makers, including Governor Andrew Bailey (main picture), on the Bank’s Monetary Policy Committee (MPC).

A sluggish economy will also have been a factor considered by the MPC as it looked at whether to freeze the rate as it did last month.

CLOSE VOTE

It was a surprisingly close vote, with five members opting for a cut of 0.25% and four choosing to keep the rate static at 4%.

Further cuts at the next two MPC meetings in February and March are also being predicted by some analysts.

The decision to reduce the rate will speak a mortgage price war agents and brokers are now predicting.

PRICE WAR

Simon Gammon, Managing Partner at Knight Frank Finance, says lower inflation “sets the stage for a price war in January”, and that “it’s possible we see two-year fixed rates dip below 3 per cent by the spring”.

Mark Harris, CEO at SPF Private Clients, says: “Given how relatively quiet activity is with the usual pre-Christmas lull, we would expect to see a 3.49 per cent rate in late December or early January.

“It might take a little longer for five-year fixes to breach the 3.5 per cent barrier but it could happen in the new year.”

INDUSTRY REACTION

Agents

Kevin Shaw, National Sales Managing Director, LRG

“Today’s reduction in interest rates is very welcome news – for homeowners, buyers, property professionals, and no doubt Government ministers.

“With a reduction in interest rates we expect an increase in activity and therefore transactions. Across LRG brands, applicant numbers are already up 15% year-on-year in December, and we’re seeing a significant number of vendors ready to launch in early January,” he says.

“Two year and five year fixed rate mortgage pricing has already shifted in anticipation and tracker borrowers will also feel the benefit.”

Lenders

Marylen Edwards, Director of Mortgages at specialist lender MT Finance

“Today’s decision by the MPC to cut rates will be welcomed by borrowers. After interest rates were cut by the US Federal Reserve last week, it seemed inevitable that the Bank of England would follow suit, particularly after inflation fell in November.

“We are hopeful that this move will instil some confidence into the market, and we will start to see more landlords, as well as owner-occupiers, transact in the New Year.”