When it comes to the movement of interest rates from the Bank of England (BoE), some find it very difficult to predict what will happen next. Since December 2021, interest rates have increased due to factors ranging from soaring inflation to Russia’s war in Ukraine.
The base rate had been holding steady at historical lows over recent years, which gave homeowners, borrowers, and businesses a little financial breathing space. However, the hikes seen over the past year or so have significantly impacted many people who have already been trying to cope with rising energy bills and the soaring cost of living.
Some are concerned that the central bank will continue to hike UK interest rates this year and into 2024. This would have a continued impact on the UK economy, the availability of mortgage deals and the housing market, house prices, the ability for first-time buyers to get onto the property ladder, and the ability of borrowers to keep on top of repayments.
After each Monetary Policy Committee (MPC) meeting since December 2021, we have seen interest rates rise. Lenders have been quick to implement the rises following the announcement of bank rate increases by the BoE and MPC. Many are concerned that these rate hikes, soaring inflation and living costs have left the nation in a financial crisis.
The impact of Bank of England rate hikes so far
The UK became very used to interest rates at rock bottom levels, which continued throughout the COVID-19 pandemic. Over recent years, many homeowners put themselves on a fixed-rate mortgage deal, which meant stable monthly payments, often attached to two-year or five-year fixed deals.
Unfortunately, many people with a fixed-rate mortgage have already been or will soon be affected by rising interest rates, as their fixed mortgages were on very low rates. Once the deals expire, many homeowners will see their interest rates and mortgage payments rocket, and affordability becomes a huge issue. On top of soaring living costs, this has left many worried about their financial future.
Last year, the mini-budget from the then-chancellor, Kwasi Kwarteng, also had a massive impact on mortgage rates. For instance, following the delivery of this disastrous budget, which led to then-Prime Minister Liz Truss firing the chancellor, the average two-year mortgage rate shot up to more than 6%. This created huge issues for those hoping to get a fixed-rate deal or remortgage to another affordable one in the wake of continued rate hikes.
The BoE claims that the only way forward was through aggressive monetary policy tightening, as UK inflation rose to its highest level in decades last year. Every MPC meeting since the end of 2021 has seen a percentage point increase, sometimes by 25 basis points and occasionally by 50 basis points.
The rate decision made at these meetings is a delicate balancing act for committee members, as they have to consider not only the impact of rate rises on bringing down inflation but also on slowing the economy. In addition, consideration has to be given to the impact on the property market, borrowing costs for consumers and businesses, and other vital factors.
What does the future hold for UK interest rates?
So, what does the future hold for interest rates in the UK? Well, depending on which economist you ask, the answer can vary. Of course, we can go by predictions to get an idea of what might happen, but with so many different factors impacting interest rate movements, it has become a real challenge for economists and analysts.
Another rate hike came at the start of February 2023, when the central bank announced that rates were increasing from 3.5% to 4%. This took the base rate to its highest level in 14 years. Many were undoubtedly dreading future meetings, as the inflation rate in the UK was still way above target, and the MPC was likely to continue taking aggressive action.
This was proven in the MPC meeting in March 2023 when interest rates again increased. With another 0.25% hike, the Bank of England announced that interest rates had risen from 4% to 4.25%. This further pressured borrowers and homeowners, as many will be hit with even higher repayments.
According to financial markets and industry experts, there are likely to be more interest rate increases in the coming months. By July 2023, the base rate could increase to 4.6%. Some have also said that the interest rate peak from the BoE will be much higher than had been expected because of its aggressive stance towards tackling inflation.
The good news is that experts believe interest rates will start to fall again after hitting this peak. However, the bad news is that it could take five years for them to get down to 3.5% – a rate still much higher than the nation has become used to over recent years.
It is also important to note that it has been a very turbulent few years, with everything from the pandemic to Brexit, the war in Ukraine, and soaring inflation having a considerable impact on the economy and interest rates. This proves just how unpredictable life can be, and all manner of unexpected incidents and crises could significantly impact current predictions about the UK interest rate.
It is interesting to look at what happened with UK interest rates during the global financial crisis back in 2008. This saw the base rate slashed from over 5% to just 0.5% to stimulate the UK economy. It was widely predicted at that time that the base rate would start to rise again in 2015. However, with inflation going into negative figures at that time, this did not happen.
When the Brexit vote came about in 2016, there were fears over the UK economy slumping due to leaving the EU. This resulted in the Bank of England slashing the base rate to 0.25%. It was 2017 when the central bank decided, after a decade, to increase the base rate slightly to 0.5%. In 2018, it rose to 0.75% due to an improved economic outlook.
However, just a couple of years later, the pandemic resulted in further cuts. First, the bank cut the base rate to 0.25% and then to a historic low of just 0.1%.
The situation now is very different, as regular rate hikes have seen the base rate rise to 4.25% as of March 2023. Whether the peak will come in July 2023 remains to be seen. However, it is worth knowing some of the critical indicators that can help predict whether interest rates are likely to fall or rise.
What are the indicators?
Various metrics can indicate whether interest rates are likely to fall or rise. Some of these are:
Rate of inflation
One of the things that can give industry experts and economists an indication of the direction interest rates will take is the rate of inflation. As we have seen over the past year, inflation can have a massive impact on the decisions of MPC members regarding interest rates. To bring inflation down toward the target of 2%, they have to be aggressive with interest rate increases. However, when inflation went into negative figures in the past, they cut interest rates.
Risk of recession
The risk of a recession is another major factor that has to be taken into consideration, as the central bank has to take steps to try and revive a flagging economy and reduce the risk of the many issues that come with a recession. However, this is a tricky balancing act, as we have seen lately. With high inflation and the nation braced for a prolonged recession, it can be challenging to determine which path the central bank will take.
Unemployment levels
Another factor considered is unemployment levels. When employment levels are robust, the chances of interest rate increases go up. The same applies when wage growth is strong, which we have seen over the past year.
Economic growth forecasts
An additional thing that can indicate whether interest rates are likely to fall, rise, or remain stable is the economic growth forecast. Economic projections from the BoE at the end of last year were bleak, with expectations of a long and deep recession. However, the central bank has since said that the recession will likely be less severe than forecast initially.
More misery for homeowners and borrowers?
So, is there more misery ahead for homeowners and borrowers? Based on the current interest rate predictions for 2023, there certainly could be some shocks coming our way over the first half of this year. However, if the predictions are correct, things might stabilise, and interest rates may even come down later in the year.
However, if this happens, rate decreases will likely come slowly, meaning homeowners and borrowers will see no immediate respite. The days of historic lows appear to have become a thing of the past and are likely to remain so for years, according to predictions. With expectations that a drop to 3.5% could take five years once interest rates peak, borrowers could wait a long time to see interest rates drop to their most recent lows.