Bank of England set to cut interest rates next week - what this means for your savings, pension and mortgage

With markets pricing in an 84 per cent chance of this cut, many are looking ahead to further interest rate reductions in 2025. The decision comes as inflation slows and the UK economy shows signs of stagnation.

Susannah Streeter, head of money and markets, Hargreaves Lansdown, said: “The scene has been set for a rate cut next week, with December’s dip in inflation and the flatlining economy taking centre stage.

"Three policymakers wanted to see a rate cut at the last meeting to boost growth, and it’s looking highly likely that more will follow their lead next Thursday and vote for a reduction."

While the details are still unfolding, many are left wondering how this will impact savings, mortgages, and pensions in the months ahead.

Savings

For savers, the Bank of England’s anticipated interest rate cut could result in lower returns on savings accounts.

Mark Hicks, Head of Active Savings at Hargreaves Lansdown, said: "With the base rate widely expected to be cut next week, a lot of the reductions have already been priced into savings products.”

When the Bank reduces the base rate, banks and building societies typically follow by lowering the interest they pay on savings accounts. For easy-access savings accounts, the impact may be particularly noticeable.

Providers paying above the base rate will likely have to reduce their rates to avoid operating at a loss. This could result in a more competitive but challenging savings market.

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However, the cash ISA market remains competitive, with some providers offering rates around or just above five per cent. Savers nearing the end of the tax year may want to consider if these rates are sustainable or if they should move their money to other options before rates are reduced further.

Hicks advises savers to act quickly, as “the easy access market will come under pressure, and very little change is expected in fixed terms.”

Pensions

Annuities have remained strong despite the likelihood of a rate cut, offering good returns for those approaching retirement.

Helen Morrissey, Head of Retirement Analysis at Hargreaves Lansdown, warned: “Annuities are riding high, and not even the prospect of an impending rate cut seems able to burst their bubble.”

Currently, those purchasing an annuity with a £100,000 pension at age 65 can expect to secure up to £7,492 per year from a single life level annuity with a five-year guarantee, just under the record highs seen after the mini-budget.

While the rate cut may affect other parts of the economy, it is unlikely to significantly impact the annuity market. However, Morrissey stressed the importance of comparison, saying: "Different providers offer different rates, so doing your research is key.”

Shopping around for the best deal remains critical for those seeking guaranteed income in retirement.

Mortgages

For homeowners with variable or tracker-rate mortgages, a rate cut could lead to lower monthly repayments. However, the effects may not be immediate or as significant as some expect.

Sarah Coles, Head of Personal Finance at Hargreaves Lansdown, said: “If you’re on a fixed-rate mortgage, the rate cut won’t affect you immediately because it’s already priced into the market.”

As of January, the average two-year fixed-rate mortgage has risen slightly from 5.48 per cent to 5.52 per cent, and it may decrease a little in the coming days. However, for those on variable or tracker mortgages, a rate cut could result in a decrease in monthly payments.

Coles added: “Even the smallest shift in rates can make a big difference to your financial resilience,” explaining that the average outstanding mortgage debt in the UK is £116,890.

Despite the potential for lower mortgage payments, Coles warned: “While things are moving in the right direction, it’s unlikely we’ll see deals return to the levels we saw a year ago.”

Although rates may not drop drastically in the near term, homeowners can expect gradual improvements, provided inflation remains under control.

While the immediate impact of the interest rate cut may not be as dramatic as some might hope, the Bank of England’s move is seen as a step towards supporting the economy and managing inflation.

Coles concluded: “If we don’t get any nasty surprises on inflation, rates are likely to be on their way down.”