The future of interest rates in the UK: What to expect

Recent forecasts indicate that the Bank of England is unlikely to reduce interest rates until at least the middle of 2024. While there may be an increase in the base rate this week, experts suggest that it could be the last in the current rising cycle. This news will disappoint those hoping for a swift decrease in borrowing costs, as rates are expected to remain high for possibly over a year. With interest rates currently at 5.25 per cent, economists on the Bank’s Monetary Policy Committee (MPC) are responsible for setting the rate. This rate, in turn, affects the interest charged to other banks and ultimately impacts consumers. As rates rise, mortgage costs increase, but on the positive side, consumers generally receive better returns on their savings.

When can we expect rates to go down?

Following the anticipated rate increase this week, experts predict that any reductions in interest rates will not occur until next year. According to Ken Wattret, vice president of global economics at S&P Global Market Intelligence, cuts may start only from mid-2024 if inflation levels significantly decline. He suggests that a swifter moderation in inflation could result in an earlier easing cycle, while stubborn underlying inflation pressures may extend the period of restrictive monetary policy. BNP Paribas and other analysts are also forecasting a rate cut in summer 2024, although some economists believe it may be even further away. Ashley Webb of Capital Economics proposes that the Bank of England is likely to keep interest rates steady throughout November, keeping rates at their peak for over a year. Webb further suggests that the first rate cut may be expected in November 2024, surpassing the average gap between the last rate hike and the first rate cut.

What conditions are necessary for rate reductions?

The Bank of England typically raises rates to combat inflation. The logic behind this approach is that higher rates discourage spending, resulting in a decrease in demand and subsequently slowing down price increases. For rates to be cut, the Bank will look for signs that inflation is significantly reducing and moving closer to its 2 per cent target. They will pay particular attention to the core inflation figure, which excludes seasonal adjustments and provides a better indication of long-term inflation trends. Additionally, a decrease in wage inflation is desired as it limits individuals’ purchasing power, leading to a decrease in the price of goods. If the UK enters a recession next year, characterized by negative economic growth, the Bank may consider cutting rates sooner. Recession often results in job losses and reduced spending, and maintaining high rates during this period may worsen the economic downturn. Conversely, if inflation persists longer than expected, rates may remain high or even require further increases.

In conclusion, the Bank of England’s decision to hold off on reducing interest rates until at least the middle of 2024 is expected to have an impact on borrowers and those hoping for a decrease in borrowing costs. While upcoming rate increases may be the last in the current rising cycle, the road to rate reductions seems to be a longer one. The Bank will closely monitor inflation levels and look for signs of decline, particularly in core inflation and wage inflation. The timing of rate cuts will depend on these factors, and while some analysts predict a cut in summer 2024, others believe it may be delayed even further. Ultimately, the future of interest rates in the UK remains uncertain, contingent on various economic indicators and developments.