Mortgage payers and business owners will be hopeful that a cut in interest rates to 5% by the Bank of England this week signals a return to the pre-pandemic era of low borrowing costs. Unless much lower interest bills arrive soon, thousands of homeowners and businesses could be forced to sell up. Claire, a maternity support worker from Portsmouth, said her mortgage payments rocketed last year and life has been “really difficult” ever since. Claire and her family moved into their house in January 2022 on a 1.99% two-year fixed repayment mortgage, paying £1,042 a month. Since then their mortgage payments have risen by more than £500 a month to £1,596.90. “It has caused a lot of worry and stress,” said Claire, 36, who lives with her husband and four children, aged between seven months and 12 years old. They hoped to release equity from their property before remortgaging in January 2024, but decided to fix their mortgage for another two years at an interest rate of about 5.7%. Claire would like the 2% loan rate to be back on the table when she refinances her mortgage again. The governor of the Bank of England has other ideas. Andrew Bailey said after a narrow five to four vote to shave 0.25 percentage points off interest rates that there was little chance of going back to the ultra-low levels of between 2009 and 2021 without another major economic shock. Rates would settle at about the level seen before the 2008 financial crisis, was the message. Economists call it the equilibrium or neutral rate and Bank documents show policymakers expect that level to be about 3.5% in three years’ time, such is the benign, shock-free future mapped out in the organisation’s central forecasts. A neutral Bank rate of about 3.5% would mean mortgages of about 4.5% to 5%, far above the level Claire and other borrowers are hoping for. When is the next fall coming? While the central bank’s policymakers have agreed a first cut in more than four years, the narrow split on the monetary policy committee (MPC), which meets eight times a year to set the level of interest rates, means analysts expect only one more quarter-point cut this year. MPC members are given the task of setting interest rates at a level that allows the economy to grow while maintaining inflation at 2%. Personal spending has driven UK economic growth for some time and MPC members are worried that low interest rates will trigger a consumer splurge, making inflation take off again. Pushing back the next move to November or December will allow the MPC to analyse the pressures it says affect long-term inflationary trends. The committee will also get a chance to judge the impact on growth and inflation of the government’s first budget, scheduled for 30 October. Bailey insisted the Bank must be careful not to cut interest rates “too quickly or by too much”. Why will interest rates plateau? Bailey wants to dispel any thought that interest rates might go back to the old “normal”. He said: “It is much more likely, it seems to me, that we are going back to a world where we will be somewhere around whatever the neutral rate turns out to be, which, it is reasonable to say, is lower than where we are at the moment but higher than when we started raising rates [in 2021].” Opinion is divided over the final resting place for the neutral interest rate, which could be as low as 3%, or as high as 4%. Much of the discussion rests on how quickly the UK economy can grow when the consumer price index (CPI) is at the Bank’s 2% target level. Yael Selfin, the chief UK economist at KPMG, said: “If we assume that the Bank succeeds in keeping inflation at 2% and the annual growth rate is 1%, the equilibrium interest rate is 3%.” In May and June the CPI was 2% and the Bank expects, after a brief rise to 2.75% towards the end of this year, that the index will fall back to the target in 2025. What could throw inflation off course? There are plenty of events that could upend the Bank’s calculations. The election of Donald Trump in November could set off a chain reaction that raises the cost of almost everything. In particular, if he cuts military aid to Ukraine and facilitates a victory for Vladimir Putin, wheat prices will rocket again, pushing up the cost of food. Gas prices would climb again. Tariffs imposed by the US on China could accelerate a trend already in train. Rich countries have become more circumspect about relying on foreign-made goods and have begun to encourage homegrown alternatives. In almost all cases they are more expensive and add to inflation, forcing central banks to maintain higher interest rates. If the Middle East conflict escalates, the main spillover effect will be on oil and gas prices. A rise in fossil fuel energy costs will send inflation soaring, at least in the short term, although conflict could also depress demand and growth. Central banks, faced with a squeeze on the supply of basic commodities, could increase interest rates again to dampen consumer demand. Lorenzo Codogno, a former chief economist at the Italian central bank, said: “Restrictions on trade are the immediate threat, especially if Trump wins the US election. But longer term, a lack of skilled workers could push up wages and inflation.” Charlie Bean, a former Bank of England deputy governor and a professor at the London School of Economics, said trade was already more difficult and costly, adding to inflation. He said the UK, which is one of the most open trading nations in the world, could find that its neutral interest rate is as high as 4%. How are other countries affected? Codogno said the outlook for growth in the eurozone is weaker, which means it has a lower neutral interest rate of 2% to 2.5%. The US neutral rate is 3% to 3.5%, he says. “And in the UK it is somewhere between the two,” he added. Dario Perkins, an economist at the consultancy TS Lombard and a former UK Treasury official, said all the big economies are affected by boomers retiring and the pressure on inflation from a lack of skilled workers. “To take account of this, central banks are planning to make small adjustments in rates and see whether events force them to do more,” he said. Claire in Portsmouth has two years to go before remortgaging and there is the prospect of lower monthly interest bills, but not to the level when she first bought her home. “We hope things will improve and we can gain some financial control again, but it’s going to be a long two years before we get there. I’m concerned if things don’t improve the only option will be selling up,” she said.