The Bank of England raised the base interest rate for the 13th consecutive time last week, and millions of homeowners are seeing mortgage repayments skyrocket. So when will interest rates fall?
The base interest rate has increased to 5%, its highest level since the 2008 financial crash. That marked a 0.5 percentage point jump, a significant reaction from the Bank of England to rising inflation.
If you have a fixed-rate mortgage deal coming to an end in the near future, or a standard variable-rate or tracker mortgage, you may be very concerned about rising rates – and also wondering if there is light at the end of the tunnel in the form, hopefully not too distant, of cheaper borrowing costs.
But to work out when interest rates could fall, it’s important to understand why they’ve increased in the first place.
If you’re looking for a new mortgage deal, and want to see the kind of rates on offer, try our mortgage comparison tool*.
Read more: What the latest Bank of England interest rate rise means for you
Interest rates have risen due to high inflation
The Bank of England’s Monetary Policy Committee (MPC) decides what happens to the base interest rate. Its job is to keep the annual rate of inflation – how much more expensive everything gets every year – around 2%, and interest rates are the main weapon in its armoury for influencing the level of demand for goods and services, and therefore their prices.
In the year to May, the annual inflation rate was 8.7%, unchanged from the month before. It may therefore appear that the MPC hasn’t been doing its job particularly well.
However, it is limited in what it can actually do. Changing interest rates only really affects how much people spend and save; if it becomes more expensive to borrow, then theoretically consumers will spend less and that will bear down on prices.
Equally, if people are paid a higher rate to keep their money in a savings account, that will also be a disincentive to spend.
This means that increasing interest rates is a useful tool to tackle inflation.
But the high inflation the UK is currently experiencing can also be attributed to supply issues:
- Russia’s invasion of Ukraine put upward pressure on energy prices, as well as the cost of grain. This has driven up energy bills and food costs
- The reopening of economies after Covid lockdowns saw demand surge, outstripping the ability to supply enough products
- Shortages of vegetables, caused by volatile weather conditions and poor harvests
- Additional red tape on imports caused by Brexit
These factors may explain why the Bank’s sustained and aggressive interest rate hikes haven’t caused the inflation rate to tumble significantly. Some analysts think upping rates isn’t the way to solve high inflation.
“For 13 consecutive times, the Bank of England has put up interest rates hoping to bring inflation under control, but without success,” says Dr Tony Syme, an expert in economics at the University of Salford.
“They are doing the same thing over and over and expecting different results. It’s time for a different remedy.”
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When will interest rates fall?
There’s no way of knowing for certain what the coming months and years hold for interest rates. But until inflation comes down, it’s unlikely that the Bank of England will lower the base rate. This is because it doesn’t want to encourage a greater level of spending and risk inflation spiralling even further.
However, rates being as high as they are is unsustainable, and the Bank understands this. Households’ monthly mortgage repayments are increasing by hundreds of pounds, and this is an enormous added strain during a cost of living crisis.
As a result, fears of a decline in spending, negative economic growth and a recession are mounting.
This means that as soon as inflation is back under control, the Bank is likely to bring interest rates down. So when will inflation fall enough for this to happen?
The Bank says it expects the inflation rate to drop significantly throughout the remainder of 2023. While it may not be able to slash interest rates quickly – or it could risk prices jumping again – a fall in inflation could mark the end of rising rates.
However, financial markets expect the base interest rate to keep climbing. It is forecast to peak between 5.75% and 6% by the start of 2024. How soon after this interest rates will fall will depend on how quickly inflation is tamed.
Projections from Berenberg Bank anticipate the base interest rate reaching as high as 5.5% by September. It expects the Bank of England to then lower rates to 4% by the end of next year.
What could happen if interest rates remain high?
The average two-year fixed-rate mortgage deal was priced at 6.23% this week, up from about 5.3% at the start of May. At the end of 2021, the average two-year rate was as low as 2%.
This leap in mortgage rates means many homeowners face far higher monthly costs; the fixed-rate mortgage deals of 1.4m households already have or will come to an end in 2023, and nearly all of them will see an increase in their monthly repayments.
These significant added costs may force some mortgage holders to sell their homes if they can no longer afford the monthly payments.
It’s also becoming much more difficult for prospective first-time buyers to get on the housing ladder, as heightened mortgage costs make affordability checks tougher to pass.
Lower demand for property has already caused house prices to fall by 3.4% in the year to May, according to Nationwide Building Society. If mortgage costs remain as high as they are for much longer, it could result in a full-blown property market crash.
House prices falling across the board could mean millions of households end up in the choppy waters of negative equity.
Read more: What’s happening to house prices?
Is anything being done to help mortgage customers?
The government is currently reviewing what mortgage lenders can do to support their mortgage customers. This could take the form of temporary interest-only payment plans while interest rates stabilise.
Some homeowners may already qualify for help from the government in the form of Support for Mortgage Interest (SMI). This is a government loan that goes towards mortgage interest repayments.
To receive it, you need to be receiving a government benefit such as Universal Credit or Pension Credit. You will pay interest on the loan, currently 3.03% annually – though this is variable so can go up and down.
For everyone else, the government has already ruled out bringing back SMI for all during the mortgage crisis.
Read more about SMI, including how to get it and who qualifies. Plus, consumer rights expert Martyn James explains your options if you’re struggling to make mortgage repayments.
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