When will interest rates go down?

Inflation has fallen again and could even reach the central bank’s target of 2% this year. But the Bank of England has held interest rates at 5.25% since August 2023. The UK economy entered recession in the last quarter of 2023, but the Bank has suggested that the downturn might already be over. So will rates soon start to fall?

The CPI measure of inflation was at 3.2% in March, down from 3.4% the month before and far lower than a year ago. With wage growth slowing more than expected, speculation has been rife that the Bank of England could start cutting rates as soon as June.

In fact, one member of the Bank’s interest-rate setting monetary policy committee (MPC) voted to cut rates in March, with all eight other members voting to keep things steady. It might not sound like a lot, but it was the first month no one voted for a rise in rates since 2021.

If you have a fixed-rate mortgage deal coming to an end soon, or you’re on a standard variable rate or tracker mortgage, you’ll be keeping a keen eye on where it will head next and when.

Times & Sunday Times subscriber? Read Political Editor Steven Swinford’s latest analysis on interest rate cuts.

In this article, we cover:

• When will interest rates fall?
• Why have interest rates been rising?
• How do higher interest rates affect inflation and mortgages?
• What help is there for mortgage customers?

If you’re looking for a new mortgage deal, and want to see the kind of rates on offer, try our mortgage comparison tool*.

When will interest rates fall?

Most analysts think that interest rates have peaked and will soon start to fall, with current market expectations placing the first cut this summer.

The Bank will lower the base interest rate to 3% by the end of 2025, according to analysis by research firm Capital Economics. This is more optimistic than projections from Berenberg Bank that said rates would fall to 4% by the end of next year.

During its March meeting, MPC member Swati Dhingra argued for cuts to come sooner – saying that waiting for more reassurance before reducing the base rate would weigh further on living standards and supply capacity. She pointed out that consumer price inflation was already, and had been for some time, on a firm downward trajectory.

Bank governor Andrew Bailey, however, has repeatedly indicated rates will remain where they are for some time.

“Inflation has continued to fall as expected. Cost pressures have eased, and the restrictive stance of monetary policy is working to bring inflation down. But we need to be sure that inflation will return all the way to our 2% target sustainably,” he wrote in a letter to chancellor Jeremy Hunt after March’s decision to hold rates at 5.25%.

He added: “The [monetary policy] committee has judged since last autumn that monetary policy needs to be restrictive for an extended period of time until the risk of inflation becoming embedded above the 2% target dissipates.”

The future of interest rates depends significantly on how quickly inflation drops – with wage growth, unemployment and services inflation seen by many as the main indicators of when this will happen.

Weaker employment figures in April will add to the case for lower interest rates – with jobs data high on the list of things the Bank of England is looking at when making its decision on interest rates.

The UK economy also just dipped into recession at the end of 2023, and part of the Bank of England deliberations when making their interest rate decision would be that by lowering interest rates, they make it cheaper to borrow money, thereby stimulating the economy.

Why have interest rates been rising?

Interest rates shot up in the UK in 2021 as the Bank of England attempted to get runaway inflation under control.

The main factors pushing up the cost of living have been rising energy and food prices and a shortage of workers, which has led to higher wage costs for businesses. To afford these extra costs, many companies raised the price of the goods and services they offer.

One of the main roles of the Bank of England is to keep the annual CPI rate of inflation at a target of 2%. The Bank’s monetary policy committee’s main way of doing this is by raising (or cutting) interest rates. It hiked the base rate 14 consecutive times from December 2021, to a 15-year high of 5.25% in August 2023.

Inflation has now fallen sharply from its 41-year-high of 11.1% in October 2022. It rose slightly in December 2023 from 3.9% the previous month to 4%, but then fell to 3.4% in February and on to 3.2% in March. Where it heads next will have a big impact on where interest rates will go. But it is not the only measure that the Bank of England looks at when setting rates.

Why has the Bank of England held the base rate at 5.25%?

There are several key reasons cited by the central bank for maintaining the rate at its current level:

• Despite being well over the 2% target, inflation has fallen significantly, which was the main objective of raising the base rate
• Increasing the base interest rate can slow an economy down; too much and it falls it into recession
• It takes time for the rate rises to be fully felt in the economy. The Bank needs to wait to see how effective the moves have been

How do higher interest rates affect inflation and mortgages?

When interest rates rise, the cost of borrowing money becomes more expensive. On the flip side, banks tend to offer better rates on savings accounts.

The hope in raising rates is that we will spend less and save more. If there is less demand for goods and services, prices will eventually fall too, thereby lowering inflation.

The Bank is particularly concerned about something called the wage-price spiral. Unemployment is low in the UK as businesses struggle to find workers to fill many vacant roles.

In this scenario, employees have more power to demand higher wages to keep up with the rising cost of living. To pay for a larger wage bills, businesses increase the price of their goods and services, keeping inflation higher for longer. Find out more about why wages are currently rising.

Read more from Times Money: Inflation’s impact on savings and mortgages

How much can raising interest rates affect inflation?

There is only so much that the Bank of England can do to influence inflation, especially given the reason it rose so much back in 2021.

For example, there is nothing the central bank can do about pandemic supply shortages, wars or droughts. But it can try to affect wages and consumer spending in this country – as well as the exchange rate. Nevertheless, the sustained and aggressive interest rate hikes appear to be significant in bringing down inflation.

How are higher mortgage rates affecting you? Let us know: questions@timesmoneymentor.co.uk

How could higher interest rates affect the housing market?

The average two-year fixed mortgage rate is currently 5.29%. It has come down substantially from a high of 6.86% in July 2023 but is a long way from the 2.17% it was in June 2021.

The leap in mortgage rates means many millions of homeowners face far higher monthly costs. The fixed-rate deals of 1.6 million households will come to an end in 2024 and nearly all of them will see an increase in monthly repayments.

Bank of England figures show a typical mortgage borrower coming off a fixed rate will see monthly mortgage payments rise by about £240, or 39%. That adds up to a £2,880 rise in mortgage payments over a year.

These significant added costs may force some mortgage holders to sell their homes if they can no longer afford the monthly payments.

Financial Conduct Authority (FCA) figures show 7.4 million people felt heavily burdened by their domestic bills and credit commitments in January, with 5.5 million missing paying a bill in the past six months.

It’s also more difficult for prospective first-time buyers to get on the housing ladder, as the heightened mortgage costs make affordability checks tougher to pass.

“Based on our current economic assumptions, we anticipate a gradual rather than a precipitous decline in house prices,” said Kim Kinnaird of Lloyds Bank.

House prices falling across the board could mean millions of households end up in the choppy waters of negative equity.

Read more: What’s happening to house prices?

What help is there for mortgage customers?

The government has spoken to mortgage lenders, and instructed them to provide greater support for their mortgage customers. Customers can temporarily switch to interest-only payment plans for up to six months while interest rates stabilise. This will not affect on their credit score.

However, it’s worth noting that if you take this step, you won’t be clearing your mortgage balance for the duration of this period. Your mortgage will therefore end up being more expensive in the long run.

Some homeowners or those that have bought a shared ownership property may also qualify for Support for Mortgage Interest (SMI). This is a government loan that goes towards the interest on your mortgage repayments or loans that you have taken out for certain home repairs and improvements, up to £200,000.

You will need to repay the loan with interest when you sell or transfer ownership of your home (unless you’re moving the loan to another property). The interest rate used to calculate the amount of SMI you’ll get is currently 3.16%.

To be eligible, you need to be in receipt of a government benefit such as Universal Credit or Pension Credit.

Our consumer rights expert explains your options if you’re struggling to make mortgage repayments.

What’s happening to savings rates?

Savings rates tend to follow the trend of interest rates in real time, as well as reflecting predictions for the future.

With interest rates being held at the same level by the Bank of England and expectations that the next movements will be down, savings rates have been falling.

Check out the top interest rates on savings accounts at the moment.

How do ‘higher for longer’ interest rates affect investments?

High interest rates for a long period of time are not good for the value of most of your investments. It reduces the amount of money flowing through the financial system that can find its way into investable assets. This weighs down prices by reducing overall demand in the market.

The impact is compounded because people expect asset prices to be held down as rates go up. This means they sell off some of their existing investments, or stop buying new assets.

Higher interest rates also tend to translate to higher returns on savings accounts. This can make investing in stocks, or other assets that carry risk, seem less attractive on a relative basis than when rates are low. 

Central banks are aware of the impact higher rates have on investments. In fact they intend it to be the case. By holding down the value of assets they reduce the amount of money people have and this causes them to cut back on discretionary spending. This in turn helps reduce inflation, which is the central goal of raising interest rates in the first place. 

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