Bank of England interest rate cuts and how you may be affected amid inflation change

Latest figures show that UK inflation dropped last month, potentially affecting the Bank of England's interest rate decision next month.

The Consumer Prices Index (CPI) rate fell from 2.6 per cent in November to 2.5 per cent in December, according to the Office for National Statistics (ONS). While this may seem like a push in the right direction, it's important to note that this is still well below the BoE's target of 2 per cent.

This week's figures come amid a particularly turbulent period for Britain's financial markets, with the value of the pound dropping significantly amid rising borrowing costs. A drop in inflation could spur the Bank to bring interest rates down, a favourable advantage for homeowners.

A change in interest rates will directly affect those with a loan or mortgage that has been set up with a variable interest rate contract. If interest rates go up, then so will your loan and mortgage payments.

However, if interest rates are cut, then you can expect your payments to go down. Those who have contracts on a fixed rate will remain unaffected by the Bank's decision on February 6 until their fixed term deadline date passes.

Furthermore, if your savings account pays interest, you might see interest rates on your savings going up if the base rate rises.

It is still not fully clear what plans the Bank of England has for interest rates right now. Many economists have pointed out that the new inflation figures could be a strong factor in weighing the Monetary Policy Committee's decision on whether to cut interest rates or not.

Another key issue sticking out for economists is that the country is yet to see the full effects of Labour's budget, with many of the economic changes being implemented this April.

Julian