Last week the Bank of England announced I had maintained the interest rates at 5.25% for the seventh consecutive time. In May, UK inflation reached the Bank’s target of 2%; however, it is anticipated that rates will remain unchanged until the Bank is assured of the stability of price increases.
Consequently, analysts speculate that individuals might have to endure a prolonged period before witnessing a substantial decline in mortgage costs. Interest rates have a direct impact on mortgage, credit card, and savings rates for a vast number of individuals throughout the UK.
So…. What are interest rates and why do they change?
Interest rates play a crucial role in the economy by determining the cost of borrowing money and the return on savings. The Bank of England sets the base rate, which affects the rates that other financial institutions charge for loans like mortgages and the interest paid on savings accounts.
Adjustments to these rates are made by the Bank of England to manage UK inflation, aiming to keep it around 2%. When inflation rises, the Bank may increase interest rates to curb spending and lower inflation. Conversely, when inflation is under control, the Bank may maintain or decrease interest rates to stimulate economic activity.
Are rates about to come down?
The potential decrease in interest rates is uncertain at this time. Despite the UK inflation meeting the Bank’s 2% target, it is projected to slightly increase throughout the year before stabilizing in early 2025, making it challenging to accurately forecast the future of interest rates.
The International Monetary Fund (IMF) has suggested that UK interest rates should decline to 3.5% by the conclusion of 2025. However, the IMF recognises that the Bank must carefully manage the risk of reducing rates too hastily before inflation is adequately managed.
Interest rates can impact individuals in various ways, particularly concerning mortgage rates. Approximately one-third of households in the UK have mortgages, with around 1.2 million individuals on tracker and standard variable rate (SVR) agreements experiencing immediate payment adjustments when interest rates fluctuate.
While over 80% of mortgage holders have fixed-rate agreements that shield them from immediate payment changes, future mortgage deals may be influenced. Presently, mortgage rates are notably higher than in previous years, with the average two-year fixed rate standing at nearly 6%, as reported by the financial information service Moneyfacts.
Consequently, individuals seeking to purchase homes or refinance face significantly higher costs compared to borrowing amounts in previous years. Approximately 1.6 million mortgage agreements are set to expire in 2024, according to the UK Finance banking trade body.
What’s happening in other nations?
The United Kingdom has maintained one of the highest interest rates among the G7 countries, which represent the world’s seven largest “advanced” economies. In June, the European Central Bank (ECB) reduced its primary interest rate from a record high of 4% to 3.75%, marking the first decrease in five years.
Conversely, during the same period, the US Federal Reserve opted to retain its key interest rates at a range of 5.25% to 5.5%, a level unchanged since July 2023, and indicated a single anticipated reduction in 2024. Previously, in March, the Federal Reserve had hinted at the possibility of three rate cuts in 2024.