8, Jul 2024
Last Updated on 10th September, 2024
The trajectory of interest rates in the United Kingdom is of significant concern for homeowners, businesses, investors, and policymakers. These rates determine the cost of borrowing money and influence economic activities ranging from investment in new projects to consumer spending on homes and goods. As such, the decision by the Bank of England (BoE) to modify interest rates can have profound implications across the economic spectrum.
Let us explore the factors that influence these decisions, the current economic indicators, and expert predictions of interest and mortgage rates in the UK.
The Bank of England is primarily responsible for setting interest rates, particularly through its Monetary Policy Committee (MPC). The MPC meets every six weeks to decide the official bank rate to encourage spending and borrowing or save and control inflation. These decisions are primarily driven by achieving a target inflation rate of 2%, which is considered optimal for economic stability.
Historically, interest rates have fluctuated significantly. Over the past two decades, rates have seen lows close to 0% during the financial crisis of 2008 and the COVID-19 pandemic, and more recently, they have increased as the BoE responds to post-pandemic economic challenges and inflation pressures. As of June 2024, the interest rate stands at 5.25% which is over 50 times higher than what it was a year and a half ago.
Update: As of August 2024, the Bank of England has revised the interest rate and dropped it to 5% from 5.25%.
Although the rates are sky-high compared to recent history, there has been a lot of activity in the property market this year. It is because the market is still optimistic that rates will go down later in 2024, prompting first-time buyers to let go of cash, even though they held on to it in 2023.
When interest rates increase, the cost of borrowing money inevitably rises. This is particularly significant in the context of mortgages, which are typically the largest loans that individuals undertake. Higher interest rates lead to increased monthly mortgage payments, directly impacting affordability for potential homeowners. This effect is most acutely felt by first-time buyers, who may find the threshold for entering the housing market moving beyond their reach.
As a result, there is a noticeable decrease in demand for home purchases among this group, which can lead to a slowdown in the housing market. This trend not only affects the availability of affordable housing but also dampens the overall economic momentum.
Mortgage holders with variable interest rates—those that track the Bank of England’s base rate—have experienced increasing mortgage costs throughout 2023. In contrast, those with fixed-rate mortgages may not have seen an immediate change in their payments, depending on the length of their fixed term.
As the end of low fixed-rate terms approaches, many homeowners are apprehensively awaiting a potential drop in rates before securing a new mortgage deal. In response to rising rates, some property owners are opting to switch from fixed to variable rates, hoping to capitalise on a future decrease in rates that would allow them to secure a more affordable deal.
For individuals considering remortgaging in 2024, it is advisable to carefully compare fixed and tracked mortgages to determine which option best suits their financial situation. Additionally, for those currently benefiting from exceptionally low rates but needing additional funds, taking out a second-charge mortgage might be a viable option. This allows them to borrow more money while maintaining their advantageous original mortgage rate.
Update: There is a discussion on how the reduction in rates is a welcome change for homeowners looking to remortgage and how it could impact affordability, particularly benefiting first-time buyers and buy-to-let investors.
Since 2021, the UK, along with much of the world, has faced rising inflation rates triggered by a combination of factors such as supply chain disruptions, increased energy prices, and recovery from the COVID-19 pandemic. As of mid-2024, inflation has remained above the target (2%), leading the BoE to increase rates to tamp down on inflationary pressures.
Update: As of August 2024, the inflation rate is set at 2% but with the interest rate going down, albeit by a small percentage, it is expected that inflation will follow suit and reduce to accommodate mortgage payments.
On the same day that the latest inflation numbers were released, Prime Minister Rishi Sunak announced that a general election would be held on July 4, 2024. In his announcement, he emphasized his parliamentary mission to “restore economic stability.” This announcement, coming shortly after the June base rate decision on June 20th, signals that economic stability will be a central theme in the upcoming election discussions.
Elections generally introduce a period of economic uncertainty, which can lead to volatility. Businesses might postpone investments during such times, potentially curtailing economic growth. The discourse surrounding the election can also influence consumer confidence, affecting their spending and saving habits. Moreover, election outcomes might alter expectations regarding inflation and interest rates, thereby impacting borrowing costs and investments.
Additionally, how the international community perceives the UK’s political stability and economic policies can influence foreign investment and trade relations. Ultimately, the overall impact of a general election on the UK economy depends on the policies of the victorious party, the level of post-election political stability, and the reaction of businesses and consumers to these changes.
Update: Now that the general elections are over, inflation and interest rates are bound to experience change. If the new government focuses on stimulating economic growth through increased spending, interest rates may remain low to encourage borrowing and investment. Conversely, if the focus is on curbing inflation, interest rates could rise to help stabilize the economy.
Global events, including geopolitical tensions and other international economic pressures, also significantly affect the UK’s monetary policy. The ongoing effects of trade disputes, oil price fluctuations, and other international developments must be considered when predicting changes in interest rates.
Answering the question “When are interest rates going down?” is not straightforward. Several key indicators need to be analyzed to provide a well-informed forecast:
Most economists and financial institutions forecast that interest rates are likely to remain elevated as long as inflation is above target. Predictions from major banks and economic research institutes suggest that a downward adjustment in interest rates might not occur until late 2025 or 2026, assuming inflation trends towards normalization.
Update: With the interest rate going down coupled with inflation, economists are of the view that another drop could be observed around November 2024.
While waiting for interest rates to decrease, there are several strategies that consumers and businesses can employ to mitigate the effects of high rates:
For now, the consensus suggests that high interest rates will persist into the near future to combat inflation, with potential reductions likely hinging on a sustained move towards the target inflation rate and stabilize economic growth. While it is difficult to predict precisely when the Bank of England will lower interest rates, monitoring economic indicators and staying informed about both domestic and international economic news is crucial.
