When Will Interest Rates Go Down?

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

Ahead of Wednesday’s Autumn Statement where the chancellor will issue an update on the state of the economy, here’s a look at what is happening with our interest rates right now.

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.

As of October 2023, inflation is at 4.6%.

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 recent decline in energy prices.

When the Bank chose not to increase it again in September (and November), 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 has dropped from 8.5% in July to 8.1% in August. 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 the impact of the higher rates introduced earlier this year – and 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, declining to 4.25% by the end of 2024.

Researchers at Capital Economics expects it to fall to 3% by late 2025, while investment bank Goldman Sachs predicts a cut could be introduced as soon as February.

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 Bank will declare any changes to its base rate during its next meeting on December 14.

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