When Will Interest Rates Fall?

Inflation has fallen – so when can we expect interest rates to follow suit?

The Bank Of England has held interest rates steady at 5.25% – for the fifth time in a row. This is despite the surprise of inflation coming down to 3.4% in February. 

What is the interest rate?

An interest rate tells you how high the cost of borrowing is, or how high the rewards are for saving.

It directly impacts credit-card holders, mortgage-owners and savers, but also affects the economy as a whole.

The rate is set by the public body the Bank of England which is independent of the government.

If interest rates are high, then people should spend less and save more, encouraging prices to fall.

It’s the main lever used to control inflation, the rate at which prices for goods and services change over 12 months.

The government has set the Bank the target of keeping this at 2% – high enough to keep the economy growing but low enough to prevent prices from spiralling out of control.

The Bank can choose to increase or decrease the base rate to change how much it costs to borrow money.

What has happened to the interest rates recently?

Prior to 2022, interest rates had been kept below 1% since the financial crash of 2008.

But, as businesses tried to recover after the pandemic only to be hit by the cost of living crisis, inflation started to soar, peaking at 11.1% in October 2022.

Since inflation started to rise in 2021, the Bank has introduced 14 consecutive interest rate rises, taking it to 5.25% – a high last seen in March 2008.

When inflation finally dropped in the summer, the Bank decided to keep the interest rate steady in both its September and November meetings in 2023.

As of February 2024, inflation is at 3.4%.

So, when can we expect interest rates to drop?

It’s not easy to predict a set date or time, but we can generally assume it will be when the Bank believes inflation is under control.

At the moment, the Bank expects inflation to return to more normal levels (2%) by around the end of 2025, based on the decline in energy prices.

When the Bank chose not to increase the interest rate again in September (and November) 2023, it said this was due to falling inflation.

But there are other factors which could encourage the Bank to drop the rates, too.

For instance, the growth rate of average earnings was 6.1% in the year to January 2024. This was only slightly lower than the 6.2% rate in the year to December 2023. This rate is also one of the Bank’s key indicators revealed the pressures on UK prices as it can push up inflation.

Keeping interest rates high can harm economic growth too, as it means investment and spending drops.

Interest rates take a long time to trickle through the economy, meaning some people are still yet to feel – or are just starting to feel – the impact of the higher rates introduced last year. High interest rates are tough to sustain in the long-term anyway.

Forecasts from finance companies about just when the Bank will lower rates differ significantly.

Investment bank Morgan Stanley expects interest rates to fall in May 2024, declining to 4.25% by the end of 2024.

Researchers at Capital Economics expects it to fall to 3% by late 2025.

The financial website, This Is Money, suggested the Bank will probably mirror any actions taken by the Federal Reserve in the US.

When is the next interest rate announcement?

The rate is set by its nine-member Monetary Policy Committee which announces any policy changes around every six weeks.