Interest rates: Bank of England decision holds UK rate, gives hope for borrowers - what it means for mortgages

The Bank of England has decided to keep interest rates unchanged in the UK, but it has also given rise to fresh hopes that borrowing costs may soon be reduced provided inflation is controlled.

Governor Andrew Bailey expressed his optimism that things are "moving in the right direction" despite the central bank's vote to keep interest rates at 5.25%.

Bailey said there has been "encouraging news" regarding inflation, which is predicted by the Bank to come close to its 2% target between April and June. But he added: “We need to see more evidence that inflation will stay low before we can cut interest rates.”

In a strong signal that the tide is turning among the rate-setters, two members of the Bank’s nine-person Monetary Policy Committee (MPC) voted for interest rates to be cut by 0.25 percentage points, to 5%.

The MPC members, Swati Dhingra and Dave Ramsden, feel Consumer Prices Index (CPI) inflation is already on a firm downward path and there is no need to delay reducing borrowing costs.

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But the committee signalled it is looking for greater progress on key economic indicators, which are continuing to put pressure on the overall inflation rate. These include wage growth and services inflation, which remain relatively persistent.

But what does the decision mean for your money? And what are interest rates anyway? Here is everything you need to know.

What are interest rates?

Interest rates refer to the cost of borrowing money or the return on investment for lending money, typically expressed as a percentage.

When interest rates are low, it becomes cheaper to borrow money for various purposes such as buying a home, financing education or starting a business - when they rise, borrowing becomes more expensive.

Perhaps most significantly, interest rates directly impact mortgage rates, with a higher interest rate meaning higher monthly mortgage payments for homeowners with variable-rate mortgages or those seeking new loans.

Lower interest rates can lead to lower mortgage payments, making homeownership more affordable and stimulating the housing market.

What does it mean for me?

The decision by the Bank of England to hold interest rates at 5.25% means that borrowing costs will remain at their current level for the time being.

For those with variable-rate mortgages or loans, this decision implies stability in their monthly payments, at least in the short term. But for savers, it means that interest rates on savings accounts and other fixed-income investments may not see an immediate increase.

But interest rates can also indirectly affect the prices of goods and services and the amount of money people have in their wallets on a daily basis, though the impact may not always be immediately obvious.

Much like borrowing costs, though the the decision to keep the current interest rate unchanged will still be noticed, it likely won’t be felt immediately or dramatically in individuals' day-to-day lives

To make a noticeable improvement in the cost-of-living crisis and improve people's finances across the country, a significant reduction in interest rates would be required.

Lower interest rates could potentially stimulate consumer spending, encourage investment and make borrowing more affordable, thus easing the financial pressures on households.

But it's essential to balance this with the need to control inflation and maintain overall economic stability.