How long will interest rates stay high?

Don’t be fooled by the base rate cut – higher interest rates are here to stay

Mortgage holders and first-time buyers alike have been eagerly awaiting the first cut to the Bank of England's base rate, which finally came at their last meeting on the 1st of August 2024. For the first time since 2020, the base rate was reduced from 5.25% to 5.0%. Many hoped this signalled a return to pre-pandemic levels of low borrowing costs. However, experts, including Bank of England Governor Andrew Bailey, caution that we're unlikely to see the ultra-low rates of 2009-2021 unless there's another significant economic shock. Instead, interest rates should settle at a level similar to rates seen before the 2008 financial crisis.

This means what economists call "the equilibrium or neutral rate" will be around 3.5% in three years’ time, which would translate to mortgage rates of 4.5-5%. We've already seen mortgage rates creep downwards, with sub-4% deals coming to market for the first time since February. Although these are only for customers with large deposits and willing to fix for 5 years, the average 2-year fixed-rate deal has also come down from 5.9% in mid-July to 5.62%.

For homeowners facing remortgaging and aspiring home buyers, the prospect of lower interest rates should offer some hope, even if these rates are higher than those offered a few years ago.

When will the next base rate cut be?

The Bank's Monetary Policy Committee (MPC) is expected to make only one more quarter-point cut this year. MPC members are tasked with balancing economic growth and keeping inflation under control. Lowering interest rates too quickly could trigger a consumer spending surge, potentially reigniting inflation. This is why the MPC will be wary of cutting the base rate too aggressively. The next MPC meeting is on Thursday 19th September 2024, but it’s unlikely we’ll see two consecutive cuts.

How long will it take for interest rates to go down?

Predicting the timeline for interest rate reductions is challenging, as it largely depends on economic performance and inflationary pressures, but interest rates are expected to come down gradually over the next few years. But home buyers and remortgagers should prepare for interest rates to stay higher for a while. In the short term, we are likely to see rates settle around the 4-5% range, as long as the UK economy can grow steadily while keeping inflation around the Bank's 2% target.

What could cause interest rates to rise?

Several factors could cause interest rates to go back up again. Global political events, such as the re-election of Donald Trump or escalating conflicts in the Middle East, could significantly impact the UK inflation rate and therefore interest rates. For example, a victory for Vladimir Putin in Ukraine, facilitated by reduced US military aid, could cause wheat prices to soar, affecting the cost of food. Similarly, increased tariffs on Chinese goods by the US could accelerate inflation. Rising oil and gas prices due to geopolitical tensions could also drive up inflation, forcing central banks to maintain higher interest rates. This is why it is impossible to accurately predict what interest rates in a few months or years could look like.

How long will saving rates stay high?

Savers have been benefitting from competitive interest rates over the past year, leading to record inflows into cash savings products like ISAs. However, there are still plenty of saving customers who are missing out. There is still an estimated £250 billion of savings held with the big banks in accounts that typically earn less than 1% interest each year. By switching to newer, often digital saving providers who offer higher interest rates, savers can get better value on their money. As we go into a lower saving rate environment, knowing whose offering the best saving rates on the market is essential.

We expect to see more and more saving customers switching to newer providers (like Tembo) to benefit from their higher saving rate products.

Will interest rates stay high in 2025?

Predicting what interest rates will be in 2025 is difficult, particularly as it's impossible to predict global economic factors which could cause inflation to go back up again. At the moment, it's expected that interest rates will keep going down gradually over 2024 and 2025. But if inflation goes above the Bank of England's 2% target, they could mean policymakers keep rates higher for longer than initially expected. If inflation drops faster than expected, or the economy slows down too much, this could prompt more rate cuts.

What is the interest rate forecast for the next 5 years in the UK?

Over the next 5 years, analysts expect interest rates to stabilise within a 3% - 4% range, gradually declining as inflation pressures subside. The Bank of England has up to now adopted a cautious approach, so will likely keep making incremental adjustments based on real-time economic performance and what's happening in the global markets. Factors such as productivity growth, wage pressures, and geopolitical events will play a role in determining which way interest rates will go.

For home buyers and remortgagers, trying to navigate this environment can be difficult. This is where working with an experienced mortgage broker can be helpful. Our smart technology not only finds the best mortgage deals for you from across the market in a matter of minutes, but your plan also auto-generates each month to reflect live rates. So you can see what rates you could be offered now, and how they change over time the closer you get to remortgaging or buying a property.