When will UK interest rates go down?

·4-min read

The Bank of England raised interest rates by a quarter of a percentage point to 4.5 per cent back in May, the twelfth consecutive rise since last December.

With inflation rates not decreasing as quickly as expected despite the interest rate hikes, many are expecting the Bank of England to raise the rates even higher - potentially as high as 5.5 per cent.

Interest rates dictate the cost of borrowing, and are now at their highest level since October 2008, during the global financial crisis.

After higher-than-expected inflation in March, inflation did actually fall to 10.1 per cent last month, according to figures published last month, from 10.4 per cent the previous month but economists had been expecting a figure of 9.8 per cent.

The Bank of England has an official target of 2 per cent – a rate not achieved since July 2021 – and Rishi Sunak has pledged to halve the rate of inflation by the end of the year. On Wednesday financial markets indicated that they expected further rate hikes.

Mortgage holders have been hit by a series of interest rate rises as the Bank of England attempts to bring spiralling price increases under control.

Matthew Ryan, from global financial services firm Ebury, said: “Sticky inflation raises the possibility that the UK economy could tip into a technical recession in 2023. On the other, it more or less guarantees that the Bank of England still has a little way to go in raising interest rates.

“We wouldn’t be at all surprised to see another couple more hikes beyond next month’s meeting.”

The MPC is the Bank of England’s monetary policy committee, which sets the Bank rate, the UK’s base interest rate.

But why are rates still rising, how high could they go and will they start to come down soon?

We explain all you need to know.

Why are interest rates going up?

Interest rates in the UK currently stand at 4.5 per cent – the highest rate in 14 years – up from 0.1 per cent in December 2021. Since then the Bank of England has increased rates 12 times in a row.

Interest rates are rising to try to ease soaring inflation, which is at 10.1 per cent – well above the Bank of England target of two per cent inflation. The idea is that, by raising interest rates, households will spend less and this should mean inflation will drop.

Prices have been rising steadily since the easing of Covid restrictions for several reasons. Pent-up demand meant people spent more money but, because companies are struggling to meet demand, prices are rising. Gas prices also increased hugely since Russia’s invasion of Ukraine.

How high could interest rates rise?

The Bank’s monetary policy committee meets eight times a year to decide interest rate policy.

Financial markets are now for the first time almost equally confident that a further rise to 4.75 per cent is inevitable at the June meeting of the Bank’s monetary policy committee.

Yet another upward move to 5 per cent is now seen as more likely than not at the August meeting with a one in four chance of 5.25 per cent being hit by the autumn. Further rises on this scale would have major knock-on implications for economic growth, increasing the risk of a recession, and hurting house prices as mortgage rates rise again.

When will interest rates come down?

Last week, the International Monetary Fund said interest rates in major countries are expected to fall to pre-pandemic levels. Before the Covid crisis, the UK base rate was 0.75 per cent. However, its report came before the ONS’s worse-than-predicted inflation figures.

Financial markets are now predicting that rates will rise into autumn.

How does the interest rate rise affect mortgages?

The rising interest rates mainly impact mortgage payers on a variable or tracker rate, as those with fixed-rate deals have made a deal with their lender to pay a specific interest for a certain number of years.

However, according to UK Finance, 1.5 million homeowners are due to complete their fixed-rate deals this year, which means their interest rate will suddenly rise to meet the current economic conditions.

Interest charges on fixed-rate mortgage deals have also gone up by 0.3 per cent according to the financial data firm Moneyfacts.

Plus, numerous lenders have removed deals while they reassess the financial market, including TSB which withdrew all of its 10-year fixed-rate deals on Friday, May 2. The bank has said that the move is “temporary” and that the deals would eventually return.