If you’ve recently checked your savings account, taken out a loan or a new mortgage, or used your credit card, you will have likely noticed that interest rates are higher than they have been for some years.
During the pandemic and the decade that preceded it, interest rates hit record lows. By the close of 2021, the base rate stood at just 0.1%. However, in a bid to counter spiralling inflation, the Bank of England (BoE) started to raise the base rate, and by the end of 2022, it stood at 3.5%. Since August 2023, the base rate has been at 5.25%.
When interest rates are set higher, saving is incentivised and spending is disincentivised. This usually leads to a fall in demand, which can help ease rising inflation.
However, despite inflation falling, the UK has fallen into recession perhaps, in part, due to higher rates of interest. There has since been speculation that the BoE may reduce the base rate to avoid a further downturn.
Read on to find out what could lead the BoE to reduce interest rates and what that might mean for your money.
Interest rates are at a 16-year high
The base rate is the highest it’s been for 16 years. Data from the BoE shows the current base rate of 5.25% was last seen in March 2008.
After several months of setting the base rate at its lowest-ever level (0.1%) during the Covid-19 pandemic, the BoE started to steadily raise the rate in early 2022 to help slow rapidly rising prices.
Reuters reports that in October 2022, UK inflation hit 11.1%, the highest level since 1981.
There were three main factors behind the sharp rise in inflation and the subsequent increase in interest rates.
The first was the pandemic, which led to a shortage of many products and services, followed by a sudden surge in the demand for them.
The second was the impact that the war in Ukraine and the sanctions imposed on Russia had on energy and food prices.
The third factor was the significant shortage in the number of people available for work in the UK following the pandemic. This led to a rise in hiring costs, leading many businesses to raise their prices to cover these costs.
There is speculation that the BoE might reduce the base rate
Inflation has steadily fallen since the BoE hiked up interest rates and there has since been speculation that they may reduce the base rate soon.
The speculation compounded after the UK fell into recession at the end of 2023, as the economy shrank in successive quarters in the second half of the year.
AP News reports that the economic stagnation behind the recession could be due, in part, to higher interest rates, which have deterred borrowing, and subsequently stifled growth.
With lower inflation and the risk of a deepening recession, This is Money reports that at the start of 2024, experts were forecasting the BoE would cut the base rate to 3.75% by the end of the year.
The BoE now faces a delicate balancing act when setting the base rate to ensure inflation continues to fall and the UK economy grows.
What lower interest rates could mean for your finances
A reduction in the base rate by the BoE can significantly affect your finances, potentially leading to changes in mortgage repayments, savings returns, and borrowing costs.
Mortgage repayments
If you are coming to the end of your mortgage term or you have a tracker mortgage, cuts to interest rates could lower your mortgage repayments.
If you have a tracker mortgage, it likely follows the BoE base rate. So, if interest rates were to fall in 2024, your mortgage repayments would likely also come down.
If you’re on a fixed rate, then you won’t see your repayments change until your fixed rate finishes. However, if interest rates fall this year, you may be able to negotiate a more competitive deal once your existing fixed-rate deal ends.
Credit cards and loans
If you have an existing business loan or credit card, or you want to take out a new loan, lower interest rates could mean lower monthly payments.
The amount of interest you pay on a credit card or loan is determined by the Annual Percentage Rate (APR). APRs are generally either fixed or variable.
Like mortgages, a fixed APR is set for a certain period with a fixed rate of interest. Conversely, a variable APR changes based on current market conditions.
So, if you have a variable APR loan or credit card, or your fixed APR term is coming to an end, and the BoE reduces the base rate, you might pay less interest on your credit if providers lower their interest rates in line.
Savings
Lower interest rates could result in diminished returns on savings accounts.
When the BoE reduces the base rate, the amount of interest you’ll earn on your savings usually comes down.
So, a reduction in the base rate could mean you see lower returns on your cash savings. You may then want to consider alternative options for how to grow your wealth in the medium to long term.
Get in touch
If you’d like to learn more about how changes in interest rates can affect your finances and how to navigate the current situation, please get in touch.
Email admin@stonegatewealth.co.uk or call us on 01785 876222.
Please note
This blog is for general information only and does not constitute advice. The information is aimed at retail clients only.
The value of your investment can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.
Your home may be repossessed if you do not keep up repayments on a mortgage or other loans secured on it.
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