By Kevin Peachey
Cost of living correspondent
The Bank of England cut interest rates from 5% to 4.75% at its latest meeting in November – the second reduction in 2024.
Interest rates affect the mortgage, credit card and savings rates for millions of people across the UK.
The first drop in rates for more than four years came in August, but borrowing costs remain high for many.
What are interest rates and why do they change?
An interest rate tells you how much it costs to borrow money, or the reward for saving it.
The Bank of England’s base rate is what it charges other lenders to borrow money.
This influences what they charge their customers for loans such as mortgages, as well as the interest rate they pay on savings accounts.
The Bank of England moves rates up and down in order to control UK inflation – which is the increase in the price of something over time.
When inflation is high, the Bank may decide to raise rates to keep it at or near the 2% target.
The idea is to encourage people to spend less, to help bring inflation down by reducing demand.
Once this starts to happen, the Bank may hold rates, or cut them.
When will UK interest rates go down further?
The current Bank rate is 4.75%, after many months at 5.25% – which was the highest level for 16 years.
However, interest rates were significantly above this for much of the 1980s and 1990s, hitting 17% in November 1979, external.
Inflation is also now far below the peak of 11.1% reached in October 2022.
The main inflation measure, CPI, rose by 1.7% in the 12 months to September 2024 which was down from 2.2% in August. This means prices are rising at a much slower rate than in 2022 and 2023.
The Bank also considers other measures of inflation when deciding how to change rates, such as price rises in parts of the economy like the services sector – which includes everything from restaurants to hairdressers.
It has to balance the need to slow price rises against the risk of damaging the economy, and avoid cutting rates only to have to raise them again shortly afterwards.
How much could interest rates fall?
It is difficult to predict exactly what will happen to interest rates as this depends whether inflation remains consistently below the Bank’s target.
The picture has altered following October’s Budget by Chancellor Rachel Reeves. It included plans to borrow and spend billions of pounds, so financial markets and the Bank expect rates to be cut more slowly than previously anticipated.
Some retailers have also suggested prices could rise owing to the extra burden of tax they face.
Donald Trump’s victory in the US presidential race is also likely to have an impact on prices globally owing to his position on tariffs, and this will influence the Bank of England’s decision making in the coming months.
How do interest rates affect me?
Mortgage rates
Just under a third of households have a mortgage, according to the government’s English Housing Survey, external.
About 600,000 homeowners have a mortgage that “tracks” the Bank of England’s rate, so a base rate cut immediately leads to lower monthly repayments.
But more than eight in 10 mortgage customers have fixed-rate deals. While their monthly payments aren’t immediately affected, future deals are.
Mortgage rates are still much higher than they have been for much of the past decade. The average two-year fixed mortgage rate is 5.42%, according to financial information company Moneyfacts. A five-year deal is 5.13%. It means many homebuyers and those remortgaging are having to pay a lot more than if they had borrowed the same amount a few years ago.
About 800,000 fixed-rate mortgages, currently with an interest rate of 3% or below, are expected to expire every year, on average, until the end of 2027.
A base rate cut may see relatively little impact on pricing of fixed-rate mortgages in the short-term. The outlook is complicated at the moment as the markets, and lenders, consider the impact of the Budget and global events.
You can see how your mortgage may be affected by interest rate changes by using our calculator:
Credit cards and loans
Bank of England interest rates also influence the amount charged on credit cards, bank loans and car loans.
Lenders can decide to reduce their own interest rates if decisions by the Bank of England make borrowing costs cheaper. However, this tends to happen very slowly.
Image source, Getty Images
Low interest rates are good for borrowers, but bad for savers
Savings
The Bank of England interest rate also affects how much savers earn on their money.
A falling base rate is likely see a reduction in the returns offered to savers by banks and building societies. The current average rate for an easy access account is about 3% a year.
Any cut could particularly affect those who take the interest from savings to top up their income.
What is happening to interest rates in other countries?
In recent years, the UK has had one of the highest interest rates in the G7 – the group representing the world’s seven largest so-called “advanced” economies.
In June, the European Central Bank (ECB) cut its main interest rate from an all-time high of 4% to 3.75%, the first drop in five years. It cut rates again to 3.5% in September.
US interest rates also fell in September, when the Federal Reserve cut its key lending rate fell by 0.5 percentage points to between 4.75% and 5%.
The cut – the first in four years – was larger than many analysts had predicted, and the bank signalled that rates could fall by another half percentage point by the end of 2024.
