Millions of UK Home owners are asking… When will interest rates go down?
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When will interest rates go down?
Interest rates play a crucial role in the economy, affecting everything from borrowing costs to savings rates. In the UK, the Bank of England has been on a streak of consecutive interest rate increases, but the question on everyone’s mind is, will interest rates go down? In this comprehensive article, we will explore the factors influencing interest rates and the predictions and outlook for the future.
Why Have Interest Rates Been Rising?
To understand the possibility of interest rates going down, it’s essential to examine why they have risen. The Bank of England’s primary objective is maintaining the annual Consumer Price Index (CPI) inflation rate of around 2%. In response to economic conditions, the Bank’s Monetary Policy Committee adjusts the base rate to make borrowing more or less expensive, thereby influencing inflation and economic growth.
Inflation in the UK has been a cause for concern, with the CPI measure reaching 11.1% in October 2022. The Bank of England implemented 14 consecutive interest rate hikes to curb inflation since December 2021. However, inflation has shown signs of stabilisation, falling to 4.6% in October. As a result, the Bank decided to hold the base interest rate at its current level of 5.25% in recent meetings.
Factors Influencing the Bank of England’s Decisions
The Bank of England’s Monetary Policy Committee (MPC) considers various factors when deciding interest rates. Here are some key considerations that influence their decisions:
Inflation Trends and Forecasts
The Bank of England closely monitors inflation trends and forecasts to gauge the effectiveness of its monetary policy. Although inflation remains above the Bank’s 2% target, the recent downward trend has provided relief. The Bank expects inflation to continue falling to around 4.5% by the end of 2023 and further decline in the following year. However, inflation is predicted to reach the Bank’s target at the end of 2025. The Bank of England have set meetings for 2024 which can be found here.
Economic Growth and Unemployment
The economy’s health and the labour market also play a significant role in interest rate decisions. The Bank of England focuses on indicators such as GDP growth and employment rates. Weakening economic growth and softer employment growth can influence the decision to hold interest rates steady to avoid further dampening economic activity.
Wage Growth and Price-Setting Behavior
The relationship between wage growth and inflation is crucial in the Bank’s decision-making process. Rising wages can contribute to inflationary pressures as businesses increase prices to cover higher labour costs. However, if employment growth softens and wage growth is tempered, it can limit inflationary pressures, potentially providing room for interest rate adjustments.
Will Interest Rates Fall?
While the Bank of England has held interest rates for consecutive meetings, the outlook for future rate cuts remains uncertain. Analysts have differing opinions on the possibility of interest rates going down. Let’s explore some projections and forecasts:
Market Expectations
Financial markets are betting on the Bank of England launching a round of interest rate cuts in 2024 due to the increasing risk of a recession. Money markets have priced in four quarter-point cuts, with the first cut expected as early as May, bringing the base rate to 5%. Further reductions could follow in the year’s second half, reaching as low as 4.25% by the end of 2024.
Analyst Predictions
While the Bank of England’s governor, Andrew Bailey, has pushed back against expectations of rate cuts, analysts believe there are growing signs of stress in the economy. Mounting evidence of significant pressure on the economy and falling inflation may lead to calls for rate cuts. Research firm Capital Economics expects the base interest rate to be lowered to 3% by the end of 2025, while projections from Berenberg Bank anticipate a fall to 4% by the end of next year. Please note these are predictions which can be wrong.
Balancing Economic Considerations
The Bank of England faces a delicate balancing act in deciding when to lower interest rates. While high-interest rates may strain households and businesses, a premature reduction could hinder efforts to control inflation and stabilise the economy. The Bank monitors economic indicators and inflation trends to determine the appropriate timing for potential rate adjustments.
Impact on Mortgages and Housing Market
The trajectory of interest rates significantly impacts the housing market, particularly for homeowners and prospective buyers. Here’s how changes in interest rates can affect mortgages and the housing market:
Existing Mortgages
Homeowners on tracker and standard variable rate (SVR) mortgage deals usually experience immediate changes in their monthly payments when interest rates rise or fall. Despite the pause in rate increases, those on tracker mortgages still face higher monthly payments compared to December 2021. Approximately 1.4 million mortgage deals are set to expire next year, potentially leading to increased monthly repayments for many borrowers.
Affordability for First-Time Buyers
Higher mortgage rates can make it more challenging for first-time buyers to enter the housing market. Affordability checks become stricter as borrowing costs rise, making it more difficult to meet lending criteria. Higher interest rates and reduced demand may contribute to a slowdown in house price growth, benefiting prospective buyers.
Potential Property Market Impact
The housing market’s performance is closely tied to interest rates. While there are concerns that high mortgage rates could lead to a property crash, stabilising the base rate and rising wages counterbalance the potential negative impact. House prices have already shown signs of falling, with a 5.3% decrease in the year to September. However, it’s important to note that prices rose by 0.9% in October, albeit lower than usual for that time of year.
Effects on Borrowing and Savings
Interest rate changes have implications for borrowers and savers alike. Let’s explore how interest rate fluctuations impact credit cards, loans, and savings accounts:
Borrowing Costs
Interest rates set by the Bank of England influence the rates banks charge on credit cards, bank loans, and car loans. Higher interest rates from the Bank can prompt lenders to increase their rates, affecting consumer borrowing costs. In October, the average annual interest rate for bank overdrafts was 22.52%, while credit cards had an average rate of 21.05%. Personal loan rates averaged 8.71%, slightly decreasing from the previous month.
Savings Rates
Savers have been eagerly awaiting higher interest rates to boost their returns. While individual banks and building societies have faced pressure to pass on rate increases to customers, savings rates have remained relatively low. Savers are advised to shop for the best deals, as many still need help with accounts offering minimal returns. The UK’s financial watchdog has warned banks against offering unjustifiably low savings rates to customers.
So when will interest rates go down?
Whether interest rates will go down in the UK remains uncertain. While market expectations and analyst predictions suggest the possibility of rate cuts in the future, the Bank of England’s decisions are influenced by various economic factors, including inflation trends, economic growth, and wage dynamics. Homeowners, first-time buyers, borrowers, and savers closely follow interest rate movements as they impact their financial circ*mstances. As the economy evolves, the Bank of England will continue to assess the situation and make decisions that balance inflation control and economic stability.
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