- Written by Kevin Beachy
- Cost of Living Reporter
The Bank of England is expected to keep interest rates at 5.25% for the seventh time when it meets on Thursday.
UK inflation reached the bank’s 2% target in May, but interest rates are not expected to fall until the bank is confident that price rises have stabilized.
Interest rates affect mortgage, credit card and savings rates for millions of people across the UK.
What are interest rates and why do they change?
The interest rate tells you the cost of borrowing money, or the reward for saving it.
The Bank of England’s base rate is what it charges other lenders to borrow money.
This affects what other banks charge their customers for loans, such as mortgages, and the interest they pay on savings.
When inflation is high, the bank – which aims to keep inflation at 2% – may decide to raise interest rates.
The idea is to encourage people to spend less, to help reduce inflation by reducing demand.
Once this starts to happen, the bank may suspend or lower interest rates.
When will UK interest rates fall?
The bank’s current interest rate of 5.25% is the highest level in 16 years.
However, it was much higher than this for most of the 1980s and 1990s, reaching 17% in November 1979.
There have been questions about why interest rates have not been cut, given that inflation is now well below its peak of 11.1% in October 2022.
However, the bank also takes into account other measures of inflation when deciding how to change interest rates, some of which remain higher than it would like.
As a result, many experts believe a cut will be more likely when the bank next meets on August 1.
The bank must balance the need to slow price rises with the risks of harming the economy, or cutting interest rates and then raising them again soon after.
How low can interest rates fall?
Although UK inflation has reached the bank’s 2% target, it is expected to rise slightly over the year before stabilizing again in early 2025, so it is difficult to predict exactly what will happen to interest rates.
But the organization, which advises its members on how to improve their economies, acknowledged that the bank had to weigh the risks of not cutting too quickly before getting inflation under control.
How do interest rates affect me?
When interest rates rise or fall, the approximately 1.2 million people on tracker deals and standard variable rates (SVR) typically see an immediate change in their payments.
But more than eight in 10 mortgage customers have fixed rate deals. While their monthly payments are not affected immediately, any future deals will be.
Mortgage rates are much higher than they have been for most of the past decade.
This means that homebuyers and those who remortgage have to pay much more than if they had borrowed the same amount a few years ago.
About 1.6 million deals are due to expire in 2024, according to banking trade body UK Finance.
You can find out how your mortgage could be affected by interest rate changes using our calculator:
Bank of England interest rates also affect the amount charged on credit cards, bank loans and car loans.
Lenders can decide to raise interest rates if they expect higher interest rates from the Bank of England. However, if rates fall, interest payments may become cheaper.
Image source, Getty Images
The Bank of England’s interest rate also affects how much savers can earn on their money.
Individual banks and building societies have come under pressure to pass on higher interest rates to customers.
There are some good deals on the market and experts say customers should shop around, as the money may be in accounts paying little or no interest.
Are other countries raising interest rates?
In recent years, UK interest rates have been among the highest among the G7 – the group that represents the seven largest so-called “advanced” economies in the world.
In June, the European Central Bank cut its key interest rate from an all-time high of 4% to 3.75%, the first drop in five years.
It suggested in March that there could be three cuts in 2024.