The Bank of England’s Monetary Policy Committee gives its latest interest rate decision on Thursday.

It has long been the assumption that when the Bank makes cuts to interest rates, two things happen. 

These are that mortgage holders benefit, and that savers lose out. While these assumptions are true in part, the reality is, of course, a little more complex, as explored by Alastair Morley in the latest issue of the INTEREST journal, from Moneyfacts.

The latest issue carries stories on the forecasting capabilities of the Bank and the MPC, mortgage lending and the origins of funding via savings deposits, insight into the impact of tariffs, the debate over commission disclosure.

The issue also dives into who benefits from base rate reductions.

Roughly 82% of all mortgage borrowers and over 95% of new borrowers since 2019 have locked into a fixed rate.

With approximately 30% of all dwellings in the UK owned with a mortgage, of which 82% are tied into a fixed rate deal, only around 5% of all households see an immediate reduction in their monthly repayments when rates come down, and vice-versa when rates go up. 

Prospective buyers may also be hoping for lower rates, however, as seen recently, cuts to Bank base rate do not necessarily result in reductions to fixed rate mortgages.

All of this is in stark contrast to the 1990s, for example, when the overwhelming majority of mortgages were at a variable rate. It wasn’t until 1989 that the first fixed-rate mortgages were available.

For savers, the impact of a Bank base rate cut comes down to the type of account they hold. In most cases, banks and building societies are quick to cut rates in response to Bank base rate reductions (and perhaps a bit slower to reflect any increases).

What about those saving for later life? 

While some believe that pension savers have benefited from lower rates, driven by the idea that higher interest rates are bad news for stock market investments, others argue that lower rates are partly to blame for the increasingly glum outlook for future retirees. 

Only recently have rising rates seen annuities become a popular option again, having been abandoned by many retirees during the stretch of ultra-low interest rates. Meanwhile, cutting rates to historically low levels reduced the returns on risk-free assets such as Gilts. In many cases, this pushed conservative investors into riskier investments.

So, if most mortgage borrowers are unaffected by an immediate rate cut, and most savers are negatively impacted, who does benefit from a rate reduction?

An obvious answer is anyone with significant debt. This includes debt-laden zombie companies, which reportedly make up between 12-20% of all UK businesses. 

Many of these companies are generating just enough cash to service their debt and have avoided bankruptcy through cheap borrowing costs. Higher interest rates threaten to wipe these firms out.

There will always be losers and winners when rates are cut. The key for those in charge is to find a balance so that no one group is forced to bear the brunt.

You can read the latest issue of the INTEREST journal, free, here.