Sterling Savvy

When will interest rates go down in the UK?

When will interest rates go down in the UK?

From Wall Street, all the way to the City of London, there’s one issue that traders are fixated on: when will interest rates start falling again?

The Bank of England’s base rate dramatically surged as red-hot inflation ran out of control, hitting levels not seen in over 40 years.

It rose from 0.1% in December 2021 to 5.25% by August 2023 as central bankers battled to bring the cost of living to heel. 

Needless to say, such a sharp, quick round of monetary tightening took consumers by surprise. Yes, it was good news for savers, but it was potentially calamitous for anyone with a mortgage.

Higher interest rates cause the cost of borrowing to surge — and we’re yet to see the full impact that this will have on the housing market.

Typically, many homeowners fix their mortgages for two or five years, and that means those seeking a new deal will see their repayments rise by hundreds, if not thousands, of pounds a month. 

The rapid uptick in the base rate was partly down to Liz Truss’s mini-budget during her ill-fated stint as prime minister, which spooked the markets.

But many experts directly link rampant inflation to the coronavirus pandemic. The UK’s Consumer Price Index spiked to 11.1% in October 2022, well beyond the BoE’s target of 2%.

Hiking interest rates is tough medicine for consumers to swallow. They’re deliberately designed to encourage people to save rather than spend, and take heat out of the economy. But as central bankers recently found out, it’s taken quite a long time for this medicine to work. 

The 20th of December delivered some pretty good news after the UK’s CPI came in at 3.9% — considerably lower than what analysts had been expecting. So… what’s going to happen next, and what impact will it have on the market? 

When will interest rates fall? 

High interest rates can have an impact on the performance of stocks, cryptocurrencies, and other risk-on assets.

Why? Because investors are less prepared to subject their capital to volatility when they have the potential to secure guaranteed returns in bank accounts.

To compound the problem, monetary tightening can adversely hit the earnings of companies listed on the stock market.

Looking ahead, experts now believe that there’s a 50% chance that the Bank of England will cut interest rates by March — dragging them away from that 15-year high of 5.25%.

However, Governor Andrew Bailey may be reluctant to cut rates too quickly too soon, for fear of undoing the progress made in cooling inflation. After all, even though the government is keen to celebrate CPI falling to 3.9%, this only represents a slowdown in the pace of price rises. Things aren’t getting cheaper.

The BoE’s monetary policy report from November sheds some light on what its economists are expecting over the next three years. They now forecast that the interest rate will stand at 5.1% by the end of 2024 — little change from now.

Then again, this is a sharp reduction from the 5.9% predicted back in August. Further falls to 4.5% are expected at the end of 2025, followed by 4.2% as 2026 draws to a close.

Ultimately, the message is this: be prepared for interest rates to be higher for longer.

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Connor Sephton is a journalist based in London. Over his 10-year career, he’s worked as a reporter, editor, and newsreader for Metro, Sky News, and the BBC.

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