When will interest rates go down?

How interest rates impact our finances?

Updated: May 22, 2024
Rebecca Goodman

Written By

Rebecca Goodman

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UK interest rates have risen significantly over the last few years as the Bank of England (BoE) has attempted to control inflation and rising prices.

The impact of rising rates has caused huge increases in the cost of mortgages, adding pressure to homeowners who are already struggling with the cost-of-living crisis.

But on the other side of things, it’s also pushed up the rate of many savings accounts, benefiting those with money stored away. As banks have passed on rates to savers, they have been able to earn more money in their savings accounts.

Since the coronavirus, when rates hit rock bottom, the BoE has been successfully pushing up, or holding, the base rate.

It’s now been at 5.25% since August 2023 while the consumer prices index for inflation (CPI), which the bank looks at when making its decision on rates, has now hit 3.4%, edging closer to the government’s 2% target.

But what will it decide to do in 2024 and when will mortgage holders start to see some good news? In this guide I’ll look at what’s happened to the base rate so far, how interest rates impact our finances — especially our mortgages and savings — and when we can expect rates to start going down.

What are UK interest rates?

The UK base rate is the main rate of interest in the UK and it’s been in place since 1694. It is decided by the BoE’s Monetary Policy Committee (MPC) who meet eight times a year to vote on the level it should be. It is a key measure people look at to see how the UK economy is performing.

The base rate is used by the BoE to control inflation and to make sure the economy is working properly. It directly influences things like mortgage rates and savings interest, which can have a big impact on the amount of money people have in their bank accounts.

It is used to stop prices rising too quickly and the government’s goal is for inflation to be at 2%. Increasing the base rate is meant to encourage people to save more and to spend less, while decreasing it has the opposite impact.  

How are UK interest rates influenced by other countries?

UK interest rates are decided by the BoE but they are influenced by other countries and economies too.

The Federal Reserve in the United States for example, and the European Central Bank (ECB) have tended to mirror the UK’s base rate. Therefore keeping an eye on what is happening in other countries can be a good indicator of what will happen next in the UK.

Why have interest rates risen?

In 2008, following the global financial crisis, the BoE dropped the base rate from 5.5% to 0.25% in August 2016. This was the lowest level ever seen at the time.

Then when the coronavirus hit the UK in March 2020, the BoE lowered the base rate to 0.10. This was as a reaction to the global and economic chaos caused by the pandemic which also sent several markets — including the housing market — to a practical standstill.

Since that point the rate has been very slowly increasing as things got back to normal but last year, the cost-of-living crisis which sent inflation spiralling, pushed the BoE into raising rates. 

The main reason inflation rose was due to the rising cost of fuel and food prices combined with a shortage of workers and labour parts. This meant companies were having to pay out more, in wages, labour, and equipment, and these costs were also passed onto consumers. 

At the end of 2021, the BoE began steadily putting up the base rate, and inflation reached a high of 11% at the end of 2022.  To try and keep a lid on inflation, and get it closer to the government’s target rate, the bank continued to raise rates, up to their current level of 5.25%. In fact, rates rose 14 consecutive times until August 2023.

Since last summer, the bank has decided to hold rates at 5.25%. This is mainly because inflation is still not at the 2% target, and it is taking its time to see how previous rate changes are impacted the economy.  

How interest rates have changed since 2018 (source: Bank of England)

DateBase rate
03 Aug 235.25
22 Jun 235.00
11 May 234.50
23 Mar 234.25
02 Feb 234.00
15 Dec 223.50
03 Nov 223.00
22 Sep 222.25
04 Aug 221.75
16 Jun 221.25
05 May 221.00
17 Mar 220.75
03 Feb 220.50
16 Dec 210.25
19 Mar 200.10
11 Mar 200.25
02 Aug 180.75

What impact do interest rates have on our finances?

The base rate is important because it makes a big impact on our finances.

Savings: when interest rates are high, banks usually increase the rate of interest they pay to savers. Over the last year savings rates have shot up, especially from challenger banks, giving savers a little respite through higher interest.

Mortgages: it’s bad news for anyone with debt if interest rates are high, and mortgage rates have risen significantly over the last year. Anyone with a fixed-rate mortgage that has come to an end will have seen their prices rise. In March 2022, for example, the average two-year 90% loan-to-value (LTV) fixed-rate mortgage was 2.76% but in March 2024 it was 5.99%, according to data from Moneyfacts.

For borrowers with tracker mortgages, which track the base rate, their prices will have been rising steadily over the last few years. Borrowers with a mortgage on their provider’s standard variable rate (SVR) will also have seen their prices rise as these rates follow the base rate.

Those with a fixed-rate mortgage may have been sheltered from price rises, but once the fixed-price period ends, they are likely to see a big jump in their mortgage costs. It’s predicted that 1.6million mortgage holders will see their fixed-price deal end in 2024, according to data from UK Finance

Will interest rates go down in 2024?

No one has a crystal ball to predict when interest rates will start going down and it’s impossible to say for definite when this might happen.

However, most experts agree that interest rates have peaked and will start to go down at some point in 2024. 

In the last meeting of the MPC, it voted by a majority of 8-1 to keep the base rate at 5.25% and only one member voted to reduce rates to 5%.

In a recent report the MPC said “we will keep interest rates high for long enough, so inflation settles at 2%” so until inflation is at this level, we’re unlikely to see an interest rate drop. However, if things continue as they have been — this could be by the summer and many experts have predicted rates to fall in June. 

What do the experts say?

Most experts agree that rates will start to fall this year, although they differ in their predictions over when this will happen.

Jonathan Haskel, a member of the MPC, recently said in an article in the Financial Times that a bank rate cut was “a long way off.”

He said: “Although the fall in headline inflation is very good news, it is not informative about what we really care about: what we really care about is the persistent and the underlying inflation.”

If inflation continues to fall, a cut to the base rate will follow, but it’s still unclear as to when this will happen. Looking at the last few years, it’s also true that anything can happen and that’s another reason why the BoE is being ultra-cautious in its actions.

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