What are UK interest rates and when will they fall?

Bank of England interest rates affect the mortgage, loan and savings rates for millions of people.
What are UK interest rates and when will they fall?
Block of flats

The Bank of England is expected to hold interest rates at 5.25% for the fifth time in a row, but cuts are expected later in the year.

Interest rates move up and down in order to control UK inflation, which has come down sharply in recent months, easing cost-of-living pressures.

However, the UK economy has been stagnating amid increased borrowing costs and other pressures.

Interest rates set by the Bank of England affect mortgage, credit card and savings rates for millions of people across the UK.

What are interest rates and why do they change?

The Bank of England’s base rate, currently 5.25%, is what it charges other lenders to borrow money.

This has a knock-on effect on what other banks charge their customers for loans such as mortgages, as well as the interest they pay on savings.

The Bank’s Monetary Policy Committee meets eight times a year to decide what the base rate should be.

It has a target to keep UK inflation at 2%. Inflation is the rate at which prices are rising across the economy as a whole.

When inflation is going up, the Bank may decide to raise rates to encourage people to spend less. The idea is that this helps to bring inflation down by dampening demand.

Once this starts to happen, the Bank may hold rates, or cut them.

How do interest rates affect me?

Mortgages

Just under a third of households have a mortgage, according to the government’s English Housing Survey.

When interest rates rise or fall, more than 1.4 million people on tracker and standard variable rate (SVR) deals usually see an immediate change in their monthly payments.

About three-quarters of mortgage customers have fixed-rate deals. Their monthly payments aren’t immediately affected when the Bank changes rates, but future deals are.

Mortgage rates are much higher than they have been for much of the past decade.

This means homebuyers and those remortgaging will have to pay a lot more than if they had taken out the same mortgage a few years ago.

About 1.6 million deals will expire in 2024, according to banking trade body UK Finance.

You can see how your mortgage may be affected by interest rate changes by using our calculator:

A modern browser with JavaScript and a stable internet connection is required to view this interactive.

Credit cards and loans

Bank of England interest rates also influence the amount charged on credit cards, bank loans and car loans.

Lenders could decide to put their rates up, if they expect higher interest rates from the Bank of England, but if rates fall, interest payments may get cheaper.

Woman with computer and piggy bank

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Savings

The Bank of England interest rate also affects how much savers can earn on their money.

Individual banks and building societies have been under pressure to pass on higher interest rates to customers.

There are some good deals on the market, so analysts say that customers should shop around, as money may be in accounts paying little or no interest.

When will UK interest rates go down?

The Bank rate is currently at its highest level for 16 years.

However, the rate was higher than this for much of the 1980s and 1990s, and was running at 17% in November 1979.

There have been plenty of questions about why interest rates have not yet been cut, with the rate of inflation dropping sharply.

Inflation was running at 3.4% in February. While that was down from a peak of 11.1% in October 2022, it is still nearly twice the Bank’s target. However, further falls are expected in the rate in the coming months.

Bank governor Andrew Bailey said the Bank would wait for firm evidence that inflation was under control before it cut rates.

The Bank has to balance the need to slow price rises against the risk of damaging the economy – which has shown little sign of growth – by keeping rates high.

Are other countries raising their interest rates?

Interest rates have also been increasing across the world.

However, in recent months, other central banks – including the US Federal Reserve and the European Central Bank – have also paused their rate rises.

Line chart showing interest rates in the UK, US and eurozone

The UK has had one of the highest interest rates in the G7 – the group representing the world’s seven largest so-called “advanced” economies.

Source: bbc.co.uk

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