When will interest rates fall? (2024)

The Bank of England's Monetary Policy Committee (MPC) has frozen the base rate at 5.25% at the previous three meetings, ending its run of 14 consecutive hikes that began in December 2021.

Falling inflation has taken the pressure off the MPC - the latest data shows a sharp drop from 6.7% to 4.6%, meaning inflation is now at its lowest level in two years.

It comes as the latest official data shows theUK economyshrank by 0.3% in October, according to the Office for National Statistics (ONS).

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This was a larger fall than expected and suggests that higher interest rates are hitting spending.

It is prompting experts to start talking about when interest rates will finally start to be cut.

But on the other hand, the latest wage growth figures suggest an interest rate reduction could be less likely in the near future.

We look at the outlook for interest rates, whether they have peaked, when they may be lowered, and what changes to interest rates mean for your finances.

What does inflation mean for interest rates?

The BoE has hiked the base rate for over a year and a half as it tried to battle inflation. This led to increased mortgage rates and prompted concerns of a recession.

While CPI remains above the Bank's 2% target, inflation is now slowing, suggesting monetary tightening is working.

In the 12 months to October, inflation fell sharply to 4.6%, from 6.7% the month before.

The BoE's latest MPC report said inflation and wage growth suggest the BoE's current stance is "restrictive," removing some of the pressure to raise rates further.

MPC members voted by 6-3 to hold rates at the December meeting, with three people voting to raise the cost of borrowing to 5.5%.

Across the pond, the Federal Reserve has also kept rates unchanged at its most recent meeting and suggested a discussion on cuts is “coming into view.”

But BoE governor Andrew Bailey has been less forthcoming on the prospect of rate cuts in the UK.

"We’ve come a long way this year, and successive rate increases have helped bring inflation down from over 10% in January to 4.6% in October, but there is still some way to go," he says.

WHEN WILL INTEREST RATES FALL?

The consensus seems to be that, bar any economic shocks, we are now at the peak of the interest rate cycle, and we're unlikely to see rates move higher.

Danni Hewson, head of financial analysis at the investment platform AJ Bell, comments: “Market expectation that we have reached peak interest rates has solidified [due to the latest inflation data].

"40% expect rates will start to fall in May next year, getting as low as 4.25% by the end of the year, and that expectation has already begun to filter through to lenders."

Indeed, major mortgage lenders have been cutting their rates over the past few months in anticipation of this.

Daniel Casali, chief investment strategist at wealth management firm Evelyn Partners, adds: "The CPI figures support the narrative that we have reached the end of the Bank of England’s rate hike cycle with the base rate at 5.25%.

"There is conflicting opinion within the MPC as to when rate cuts will occur, with the BoE chief economist Huw Pill hinting at rate cuts sooner than expected. However, Bailey has downplayed these comments and reiterated the need to reduce inflation to the target level of 2%."

Inflation isn't the only factor the Bank considers when setting interest rates. Wage growth is another key metric.

Private sector regular earnings, excluding bonuses, rose by 7.3% in the three months to October, down from 7.8% in the previous three months. This slowdown in pay growth may reinforce the case for the MPC to hold off from raising interest rates further.

While some experts are forecasting a rate cut in the first half of next year, others think interest rates won't start to fall until later next year.

Paul Dales, chief UK economist at the consultancy Capital Economics, says: "Our forecast is that the downward trends in CPI and core inflation will stall over the next few months before starting to edge lower again in February. But even then, we think the restrictions on labour supply and the stickiness of inflation expectations will mean that inflation fades slowly rather than suddenly.

"That explains why we think the Bank won’t feel comfortable cutting interest rates until late in 2024 rather than in mid-2024 as priced into financial markets."

Nicholas Hyett, investment manager at Wealth Club, says there is logic to holding rates steady at the moment.

"Central banks have a history of folding under the economic pressure and declaring victory on inflation too early," he says.

"But leave rate cuts too long and there’s a risk the interest rate cure becomes worse than the inflationary disease.”

When is the next interest rate review?

The MPC meets eight times a year to discuss whether it should raise or cut interest rates, or keep them the same.

It last met on 14 December, when it decided to maintain interest rates at 5.25%.

That was the last MPC meeting of 2023.

The first interest rate meeting of 2024 will take place on 1 February. For all the 2024 dates, check out our Key dates for 2024 article.

What will an interest rate fall mean for my mortgage?

Homeowners have been forced to take on big increases in monthly mortgage costs as their fixed deals end. Around 1.6 million mortgage deals are due to end in 2024, meaning customers will likely have to remortgage onto much higher rates.

Mortgage rates remain high, due to the turmoil a year ago following the disastrous mini-Budget, and due to 14 consecutive base rate increases.

But lenders have been trimming rates over the past few months - and those mortgage cuts have accelerated since the Bank froze the base rate twice in a row, and in light of the sharp drop in inflation.

As of the end of December, the average two-year fixed mortgage deal was 5.95%, while the average five-year fix was 5.57%, according to Moneyfacts.

However, until the Bank actually cuts interest rates, mortgage rates are unlikely to drop much further. Capital Economics expects mortgage rates to stay at around 5% "until we near the first Bank rate cut in autumn next year".

What will it mean for my savings?

Savings rates have been rising rapidly, but are now starting to plateau, and in some cases, fall. Many of the best savings rates are already disappearing from the market.

“Savers should move fast, as this may be the peak for saving rates. As the economic outlook changes, the shelf life on the best deals is expiring fast, so those that still want bumper returns on cash should shop around now before the top rates disappear completely,” says Alice Haine, personal finance analyst at the investment platform Bestinvest.

Shopping around for the best rate is vital: don’t assume your provider has been raising your rate every time the Bank of England has hiked rates. You’ll need to proactively look for a top savings rate and switch your account to take advantage.If your savings account is not on sale to new customers anymore, you could be earning less than 1% interest.

Check out our round-up of the best easy-access rates, one-year savings accounts, regular saver accounts and cash ISAs.