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UK Interest Rates: Projections over the Next Five Years | BoE Analysis

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What's the latest UK Interest Rates forecast for the next 5 years? When will UK Interest Rates start to go down and when is the next interest rate decision in the UK? According to the latest forecasts, UK Interest Rates are predicted to fall from 5.25% to around 4.5% by the end of 2024, with the first rate cut forecast in June 2024. UK interest rates forecast for the next 5 years are to remain higher for longer than has been the case over the last two decades, with UK interest rates staying between 3% and 4%. We analyse the economic context, BoE's policy stance, and global factors to provide insights on the uk interest rate forecast including insights on the question most people are asking right now; “When will interest rates go down?” Read on to learn what it means for borrowers, savers, and investors.

What is the latest UK Interest Rate forecast as of 14th February 2024? 

After UK inflation remained steady at 4% in January when economists had expected a small jump in prices, most traders are now betting that UK interest rates will be cut by 0.25% in June 2024. UK interest rates are then forecast to fall to around 4.5% by the end of 2024 though with inflation proving stickier in the US and EU, these forecasts for UK interest rate cuts are far from ‘locked in’.

When will UK Interest Rates go down in 2024? 

Everyone is asking when UK interest rates will finally go down, after such a steep and fast rise to the current rate of 5.25%. The good news is the answer to this important question is ‘soon’. The latest UK interest rate forecasts indicate that 2024 could be the year global interest rates start to fall and this includes UK interest rates.

According to the latest Bloomberg Implied chart tracking the latest UK interest rate forecasts, most economists are convinced that UK interest rates will start to go down in 2024. The latest forecasts are for UK interest rates to start to go down from around June 2024, where financial markets are pricing in around 4 cuts to the UK Interest Rate from 5.25% at the start of 2024 to 4.5% by the end of 2024. The latest forecasts are that UK interest rates will go down by 0.25% in June 2024 followed by further cuts of 0.25% in July, September and November. Meaning UK interest rates are set to go down by around 0.75% in 2024. However, it’s worth pointing out that whilst this marks a significant fall in UK Interest Rates, financial markets are not expecting UK rates to trade much lower than 3.5% to 4%, at least in the next five years forecast. 

Table of contents

This article is updated every few days to bring you the breaking news and analysis concerning the latest UK Interest Rates Forecast for the next 5 years including as well as when is the next UK interest rate decision.  

The Story For UK Interest Rate Forecasts So Far…

UK interest rates have been rising rapidly since December 2021 having hit record lows in August 2020 when the Bank of England (BoE) last reduced the base rate from 0.25% to 0.10% in response to the COVID-19 pandemic. Since then, rising inflation has dramatically changed the BoE’s interest rate stance with the UK’s Monetary Policy Committee (MPC) - which decides UK interest rates - voting to increase the UK’s base interest rate multiple times in an effort to curtail rising inflation, which is seen as a significant threat to the UK economy.

2023 has been a year of dramatic changes in interest rate predictions on how high UK interest rates will go. After initially forecasting UK Interest Rates would likely rise to as high as 6.5% by the end of 2023, those predictions changed dramatically after a summer of positive UK inflation data. This means that today, UK interest rate forecasts are much more mild than predicted at the start of the year, with the UK interest rate forecast for the next five years showing how UK interest rates have likely peaked at 5.25%. Thereafter, the answer to the important question of ‘when will UK interest rates start to fall’ appears to be throughout 2024 and 2025, with UK rates predicted to fall back towards 4% by the start of 2026.

In this article, we explore the UK interest rate forecast for the next five years, considering the UK’s economic outlook, the BoE's policy stance, the global context and latest developments to give you a complete overview of the UK interest rate situation.

LIVE UPDATES:

14th February - UK Inflation remains steady at 4% in January, traders boost bets that UK interest rates will be cut by 0.25% in June 2024

UK inflation remained at 4% in January when most economists had forecast UK inflation to nudge higher to 4.2%, giving investors and homeowners a boost that UK inflation remains on track to fall towards the Bank of England’s 2% target. Core inflation - which strips out volatile items like energy and food - also remained at  5.1% against expectations of a small rise to 5.2%. 

Chart - UK Inflation remains steady at 4% in January


Source: Trading Economics

So what does this inflation reading mean for interest rate cuts?

Traders have increased bets that thanks to inflation remaining steady at 4%, UK interest rates will be cut by 0.25% in June 2024. Before today's inflation reading, there was a 40% probability of a UK interest rate cut in June and those odds have now increased to 70%. Part of the reason behind this is because inflation was expected to nudge higher in January, which didn’t come to fruition. Moreover, UK Inflation is widely anticipated to enjoy another substantial decline in the spring due to a drop in energy bills. That is expected to create headroom for the Bank of England to start cutting UK interest rates without risking further increases in the rate of inflation.

Moreover, traders are now pricing in at least 3 interest rate cuts of 0.25% in 2024, which is an increase from just 2 cuts forecast earlier this month. So it seems the market is moving faster towards a conviction that there will be a 0.75% cut to UK interest rates in 2024, starting from June.

1st February - UK interest rates held at 5.25%. Bank of England is more split than ever as dovish pivot does not mean rate cuts 

Dovish Pivot does not mean rate cuts as BOE sees inflation on a rollercoaster ride this year. BOE and Fed seem less dovish than the ECB, as longer-term CPI forecast is revised higher. 

The Bank of England held interest rates steady on Thursday at 5.25%, but they did perform their own ‘dovish pivot’, they have removed the reference to further tightening in their statement. However, the market is finding out that dovish pivots do not mean rate cuts. The BOE Governor Andrew Bailey has pointed out that even if inflation does fall back to 2% this year, it is not job done. The problem with CPI is that the good news on price declines, mostly from falling oil and gas prices, will fall out of the index in the coming months. The BOE is concerned that inflation could do its own pivot, although they see inflation falling to 2% in the next few months, they are worried about it rising again. 

The hawks aren’t for turning 

We mentioned in our preview that one of the things to watch in this meeting is the vote split. This is fascinating, the BOE is more divided than ever, with one member voting for a cut, two members voting for a rate hike, and 6 members sitting on the fence. Megan Greene, who voted for a hike at the last meeting, shifted her stance to keeping rates unchanged, while Swati Dhingra voted to cut rates. The decision to hike rates by two MPC members was a shock to the market, as some were expecting all the hawks to shift to a neutral stance. They have justified their decision, according to the BOE meeting minutes, by saying that they are still worried about a tight labour market, rising wages and persistent inflation pressure. Considering wage growth remains well above the BOE’s target rate and CPI ticked higher in December, it doesn’t sound like they will be appeased on the inflation front any time soon. The BOE has made a slight dovish tilt, however the bar is still high for rate cuts. Like with the Fed, the market seemed more comfortable with rate cuts than the BOE, and it’s worth remembering that 6 members of the BOE voted for no change. 

BOE walks the tightrope of forward guidance 

The BOE is firmly on hold, and the BOE’s guidance is also not straightforward. In the meeting minutes they said that they will review the amount of time that ‘Bank Rate should be maintained at the current level’, and they also said that policy will need to remain ‘restrictive for sufficiently long’ to suppress inflation pressures. This does not support near term rate hikes, it suggests that the BOE is on hold, but the ‘higher for longer’ mantra has been put on notice, and if they see inflation pressures subside then they will cut rates. 

The market impact of a less dovish Fed

The BOE’s message is less dovish than expected, and the market has responded by pushing up Gilt yields along the curve, the 2-year yield is currently up by 4 basis points and the 10-year yield is higher by 3 basis points. GBP/USD is clawing back some earlier losses, and is testing $1.27, and the FTSE 350, which contains domestically focused companies, is backing away from daily highs. The market is also recalibrating expectations of when the BOE will first cut interest rates. The market has pushed back the chance of the first rate cut from May to June, with a small chance of a cut in May. The market now sees rates ending 2024 at 4.07%, with just over 4 rate cuts priced in for next year. 

Chart 1: World Interest Rate Probability 

Source: Bloomberg 

BOE and the Fed seem less dovish than the ECB 

Andrew Bailey has struck a similar tone to the Fed, saying that they want to see further evidence of a sustained decline in inflation before they cut rates. In this way, the BOE and the Fed seem to be less dovish than the ECB. The BOE and the Fed are not willing to pre-commit to a rate hike at a certain time, in contrast, Christine Lagarde at the ECB has pointed to the summer as a good time for the ECB to cut rates. The BOE is following the Fed and is in data-watch mode, with Bailey saying that any rate cut will depend on how the outlook evolves. This increases the volatility around key UK data announcements like CPI, wage data and PPI. 

UK only major economy predicting inflation falling below target 

The BOE’s inflation forecast was unexpected and highlights how the BOE does not think that inflation will fall in a straight line. The BOE said in its Monetary Policy Report that the speed of price decreases is slowing, which is to be expected. The Bank thinks that lower oil and gas prices could push inflation below the 2% target rate in the near term, but only for a brief period, before inflation rises again. The BOE is the only major central bank currently predicting inflation to fall below its target rate this year, however, it is also the only major central bank predicting a bumpy path with highs and lows for inflation in the coming year. Overall, the BOE sees the disinflation trend continuing and it now sees CPI at 2.75% by year end, down from the current rate of 4%. 

The forecast summary included in the Monetary policy report includes an upgrade for growth forecasts. The UK economy is now forecast to grow by 0.5% in Q1 2025, the previous forecast was for flat growth. However, the Bank’s modal projections for inflation have been revised lower in the near term, and higher in the longer term. The BOE now expects Q1 CPI to be 3.6%, previously it expected 4.4%. However, for Q1 2025, the BOE has revised its projection, with 2.8% CPI growth expected, previously it was expected to be 2.5%. The forecast for Q1 2026 has also been revised higher, previously this was expected to be 1.9%, which is below the BOE’s target rate, now it is expected to be 2.3%, with inflation not falling below the target 2% until Q1 2027.

Chart 2: Forecast Summary 

Source: Bank of England 

17th January - UK Inflation posts surprising rise in December. Investors now doubting if UK Interest Rates forecasts will change after initially expecting an interest rate cut in May 2024

Bright spots for the UK’s inflation outlook

There was some good news in this data set, the largest downward contribution came from food and non-alcoholic beverages. Added to this, owner occupier housing costs, which have had a big upward impact on inflation in recent years, have stabilised. The annual rate remained steady at 5.3% in December, the same rate as in November. Not so encouragingly, the monthly rate for owner occupier housing costs rose by 0.4% in December, the same rate of growth as December 2023, most likely driven by rental costs as mortgage rates have fallen substantially.  

As you can see, upward price pressures in December were a mix of temporary factors and more structural increases. The UK is now in line with its G7 peers, and the UK’s 4% headline CPI rate is below France’s inflation rate for the first time in two years.

Where could inflation go next?

There are three factors that could determine the direction of price growth in the future. Firstly, the minimum wage will rise by 12.4% for over 21 year olds from April this year. This could increase upward pressure on the CPI rate, if businesses try to pass through higher wage costs to consumers. Secondly, the energy price cap is expected to decrease by 14% in April, and the average energy customer could see a £268 reduction in their bills compared with January’s prices.

Lastly, concerns about the geopolitical tensions in the Red Sea and their impact on the global inflation rate, could be overdone.  Even though events in the Red Sea are serious from a geopolitical standpoint, the effects on the inflation rate could be less severe. The oil price has failed to move significantly higher on the back of the Houthis attacks, and Brent crude is currently below $78 per barrel. Added to this, some ships are still sailing through the Red Sea, and a reroute around the horn of Africa adds approx. 9 days to a tanker’s journey to the West. This is not disastrous for the shipping industry, or for the price of consumer goods, in our view. We do not think that the global economy will face the same level of supply disruption as it did during the pandemic, and for now the markets are not in panic mode, for good reason.

On balance, XTB’s Research Director Kathleen Brooks thinks that the disinflation trend remains intact for the UK economy, and that price pressures remain manageable. However, wage growth linked to the rise in the minimum wage is unknown, and is a reminder that some upside inflation risks remain.

What does the inflation data mean for the Bank of England?

In the aftermath of the UK’s CPI data, the market has pushed back its expectations of when the BOE will start to cut interest rates. The first cut is now expected in June, a few days ago the market had expected the first rate cut to come in May. The market is now pricing in just over 4 rate cuts this year, it had been more than 5 rate cuts a few weeks ago. However, if we see further increases in the inflation rate in the coming months or if we see economic data pick up, then we could see expectations for the first rate cut from the BOE to move deeper into 2024, and potentially out to the late summer.

Chart: Bloomberg market based rate cut expectations

Source: Bloomberg 

The UK is not alone in seeing rate cut expectations shift this week. Central bankers have given the markets a dose of reality on rate cut expectations in recent days, and we have seen a scaling back of expectations for the US and Europe along with the UK.

The market impact:

Sterling initially rallied on the back of the inflation data, however GBP/USD could not extend gains above $1.27. As we mentioned above, the Federal Reserve is also pushing back on the market’s expectations for US rate cuts, which is also putting upward pressure on the dollar. In the hours after the inflation data had been released, GBP/USD was mostly stable. UK bond yields also rose sharply on the back of this data. The 2-year Gilt yield rose by 19 basis points to 4.36% on Wednesday. UK stocks also came under pressure, as global risk sentiment waned, and as bond yields surged.

Volatility is here to stay

Overall, the UK’s inflation data suggests that inflation does not fall in a straight line. Also, as the market reacts to economic data, this has a big effect on interest rate expectations. When interest rate expectations shift, as they have in recent days, this causes volatility, which moves markets. This volatility also generates opportunities for traders. Looking ahead, we see a much higher rate of volatility in financial markets in the next few months as we wait for central bankers to start loosening monetary policy. 

18th November - After Bank of England keeps UK Interest Rates on hold at 5.25%, financial markets are rapidly predicting UK interest rates are set to fall by around 1% in 2024, back down to 4.25%, according to Bloomberg market data

After the Bank of England decided to keep UK interest rates on hold at 5.25% for a third consecutive month, financial markets and economists are rapidly changing their focus from how high UK interest rates will go to when will UK interest rates go down. A crucial meeting by the US Federal Reserve last week highlighted that US interest rates are now expected to go down at least 4 times over the course of 2024. This has put extra pressure on the Bank of England to do so similarly and according to the latest charts tracking predictions by economists on the path of UK interest rates, it’s now forecast that UK interest rates could also go down significantly in 2024.

Here’s XTB’s Chief Market Analyst Walid Koudmani latest thoughts on when UK interest rates will go down:

“Following an intense week of central bank decisions with most of them being in line with expectations of keeping rates unchanged, it's become evident over the past few months that financial markets are aligned in the belief that UK interest rates have reached their peak and it would be surprising if the Bank of England were to implement an increase in UK interest rates in the near future, with such a decision likely only occurring in response to a substantial shock in inflation data. Meanwhile, predicting the timing of the initial interest rate cut, which would mark the first fall in UK interest rates since March 2020, is more challenging. 

One thing that remains clear is that the UK economy is in a much worse position than both its European and US counterparts as GDP forecasts continue to indicate the potential for a recession which may trigger a response from the central bank. The BoE has also appeared to follow the US central bank (Federal Reserve) in its footsteps and may await the signal from it before starting its own rate cut cycle as rates are also expected to start falling in early 2024. In either case, new Bloomberg projections point to the possibility of the first rate cut being implemented by the Bank of England in the summer of 2024, followed by a gradual fall in rates throughout the following meetings with the target being reached in the coming years.That being said, I believe the chances of rates starting to fall closer to March or April 2024 are increasing.”

Chart - Bloomberg implied UK interest rates

28th November - UK Interest Rates forecast to remain at 5.25% before falling to 5% in August 2024. Here are the latest uk interest rate forecast according to Bloomberg market data

In early November the Bank of England kept UK Interest Rates on hold for a second consecutive month at 5.25%. That decision was widely expected by market participants and their attention has firmly turned to the timing of when UK interest rates will go down or be cut.

What has been clear for some months is that financial markets are in agreement that UK interest rates have hit their ceiling. It would be a shock if the BoE were to raise uk interest rates above 5.25% anytime soon and this decision would likely only come if there was a significant shock to inflation data in the coming months. 

The timing of the first interest rate cut - which would be the first cut to UK interest rates since March 2020 when rates were cut from 0.25% to 0.1% in a symbolic move to help contain the market fallout from the Covid pandemic emergence - is far less predictable. In the past week several Bank of England policy makers has been hitting the newswires in an effort to temper expectations of a uk rate cut for the summer of 2024. Jonathan Haskel - an external member of the BoE’s Monetary Policy Committee - stated today that it could take at leats a year for the UK labour market to loosen which means that there is no scope to lower borrowing costs ‘anytime soon’. His words echo that of BoE Deputy Governor Dave Ramsden who told Bloomberg TV that high services price inflation was a sign of inflation becoming more ‘homegrown’ - a signal that UK inflation could remain much more stickier than that which would allow a rate cut.

The key message from central bankers has been - UK Interest Rates won’t rise any further but they also won’t fall for some time yet.

Here are the latest UK interest Rate forecasts according to data from Bloomberg

According to the latest implied rate chart by Bloomberg, UK Interest Rates are expected to remain at 5.25% until the summer of 2024. The first UK Interest Rate cut is expected by August 2024 with rates predicted to fall to 5.00% with a further rate cut expected by November pushing UK interest rates down to 4.75%.

Chart - Bloomberg Implied UK Interest Overnight Rate & Number of Rate hikes and Cut

21st November - BoE Governor Bailey warns consumers Inflation won’t fall quickly and UK Interest Rates forecast to remain higher for longer

In comments made to MP’s, the Governor of the Bank of England Andrew Bailey warned consumers not to underplay the potential for inflation to remain sticky despite positive declines in prices in recent months. Bailey commented “We are concerned about the potential persistence of inflation and we go through the remainder of the journey down to 2 percent…And I think the market is underestimating that.” 

Currently the financial markets latest UK interest rate forecast is for UK rates to remain at current levels of 5.25% until August 2024 where markets are predicting the first interest rate cut of around 0.25%, bringing UK Interest rates back down to 5%. UK rates are expected to float around similar levels before further predicted cuts into 2025 likely to bring UK Interest rates down further to around 4.5%.

Importantly Governor Bailey reaffirmed market forecasts that UK rates are unlikely to rise further by confirming his belief that BoE’s current policy approach should be enough to bring UK inflation back to its 2% target over time. The key message from Bailey was that this return to 2% won’t be fast and in that sense the market might be wrongly assuming interest rates to be cut sooner than the BoE can do so. The latest forecasts by the UK central bank is for Inflation to be back under its 2% target by the end of 2025, which is partly explaining the market forecasts for larger cuts to the UK Interest Rate to happen in 2025 as opposed to sooner in 2024.

What’s the latest mortgage rate predictions for the UK?

Average UK mortgage rates have steadily declined in recent months thanks to a marked improvement in two crucial areas. First and foremost, UK inflation declined to 4.6% last month to hit its lowest level in two years, marking three consecutive months of positive data surrounding UK inflation. The decline in UK inflation has convinced most in the market that UK interest rates have now peaked and the conversation has quickly turned to the likely first rate cut to happen in the summer of 2024. That has meant the horizon for longer term mortgage rates has improved markedly since the summer.And secondly, UK government bond yields have steadily declined as exemplified by yield on 2-year UK government bonds falling from 5.49% in July 2023 to 4.57% today, a marked improvement. Mortgage rates are directly linked to bond market yields and so the improvement of UK bond yields has created a much more favourable rate environment for mortgages in recent months. 

So what does this mean for predictions on UK mortgage rates? We’ve seen mortgage lenders react to the improving UK Interest rate environment by cutting prices on mortgages consistently over the past few months. The average mortgage rate offered for 2 year fixed mortgages is now priced below 5%. Average five year fixed mortgage rate is still exceeding historical averages to trade at 5.8%. Data from the FCA shows that 1.4m mortgages are up for renewal before the end of the year, meaning that a significant number of homeowners still face a shock of a big jump in mortgage prices when they renew in the coming weeks and months. 

15th November - UK inflation cools faster than expected: UK Interest Rates not expected to rise further and latest forecasts are for a UK rate cut in August 2024

Data out by the Office of National Statistics on 15th November showed that UK inflation cooled down from 6.7% to 4.6%, which was better than initial forecasts for a slowdown to 4.8%. The data showed UK inflation is now at its lowest level for two years whilst core inflation - which strips out volatile items like energy and food - also falling better than expected to 5.7% from 6.1%.

Chart - UK inflation falls to a new two year low

source: Trading Economics

What does the latest inflation data mean for the latest UK interest rates predictions?

XTB Director Joshua Raymond commented on the UK interest rate forecasts in the below note which was sent to the media after the inflation data was released: 

“We’ve seen investors sell the pound today in reaction to the better than expected inflation data. As a result, the pound lost ground against every major currency in early trading including -0.1% against the dollar and -0.3% against the euro. That’s by no means a major currency move, but what it does show is that investors are convinced the Bank of England has finished hiking rates and they are starting to feel that the first interest rate cut - expected to come in August 2024 - is now more likely. Moreover, core inflation - which strips out the volatile energy and food items - also came in better than expected to 5.7% and that’s important to see. 

It’s worth remembering the positive inflation trend we’ve seen in recent months against market expectations. This is the third consecutive month that UK inflation data has not disappointed and it comes hot on the heels of better than expected US inflation data yesterday. We know from our clients that this week was such an important one for setting their interest rate expectations in the medium term and there was a degree of nervousness heading into yesterday morning’s session. So we are certainly seeing some relief from investors this morning helping UK stocks to rally by close to 1% in early trade. The inflation data is by no means enough of a sign for central bankers to declare victory over the fight against inflation. The fight was never about returning inflation from 11.1% to less than 5%. Given the turnaround in wholesale energy markets and supply, this was always likely. The real battle is returning inflation to around the 2% target and it's here where the battle is perhaps most difficult.” 

7th November - Latest UK Interest Rate Forecast: Rates likely to remain at 5.25% until late 2024 with the first rate cut arriving in August 2024.

Last week the Bank of England moved to keep UK Interest Rates on hold at 5.25% for the second time in a row, with the decision widely expected by investors. However, the UK central bank also gave investors and mortgage holders more clues as to the likely path of UK Interest Rates for the next few years with the BoE expecting rates to remain higher for longer than initially planned.

So what are the latest forecasts for UK Interest Rates and how are rates likely to change over the next five years?

The latest predictions for the path of UK Interest Rates over the next 5 years are for interest rates to remain at or around current levels at 5.25% until the summer of 2024. That means UK interest rates will remain higher for much longer with a small chance of a further interest rate to 5.5% possible should UK inflation remain more sticky than expected. UK Interest rates are expected to end 2024 at around 5% before falling further to around 4.5% by the end of 2025, where they are expected to remain. That would mean that UK Interest Rates are following a similar predicted theme internationally, where US and EU Interest Rates are also expected to be cut from the summer of 2024.

Chart - Bloomberg Implied UK Interest Rate Wave

How might the latest UK Interest Rate Predictions change?

There’s been a few mixed signals from the Bank of England in the past week about the path of UK Interest Rates. On the one hand the BoE said - when keeping rates on hold last week - that they are prepared to hike interest rates again should inflationary pressures not recede and there are more chances of rates going up than down in the near term. However, this week the BoE’s Chief Economist Huw Pill stated that the bank could be in a position to ‘reassess or consider’ its stance on rates in the middle of 2024 - largely seen as an indication that it could be willing to start rate cuts from the summer of 2024. 

So there is potential for the current 5 year UK Interest Rate predictions to change quickly in the near term. Much of this relates to the combined effects of high inflation and an underperforming UK economy. UK inflation had cooled off from previous highs but recently plateaued around 6.7%. With average UK earnings earnings rising and staying at record highs at 7.9% in July and holding at 7.8% in August, there is a real risk that these so called secondary inflationary effects could cement inflationary pressures in the UK economy, which could make further cooldowns in inflation (especially below 5%) much harder to achieve. Moreover, with the conflict in Israel/Gaza continuing to threaten contagion to the broader middle east region, there is the risk of higher energy prices which could create a second wave of inflation in the UK. So it’s easy to see how the risks on rates continue to be towards further rate hikes as opposed to sooner rate cuts.

That being said, any data pointing to a marked deterioration in the UK economy could bring the rate cut which is currently planned for August 2024 forward.

What are the key data points to watch for Interest Rate decision making?

The key focus for economists, mortgage holders (especially those on variable rates) and investors remains on inflation, earnings and GDP data. For rate cuts to come, UK Inflation data must be seen to be cooling down with momentum with average UK earnings stable. 

We’ve put down some important data release dates to watch for the rest of 2023:

  • 10th November 2023 - Q3 Preliminary GDP data released
  • 14th November 2023 - Average Earnings data for September released
  • 15th November 2023 - UK Inflation for October released
  • 12th December 2023 - Average Earnings data for October released
  • 13th December 2023 - UK Inflation for November released
  • 13th December 2023 - Q3 GDP data revised

For more information on economic data, please see the calendar available on xStation.

2nd November - Bank of England holds UK Interest Rates at 5.25%. UK Interest Rate Forecast is for rates to stay at 5.25% for an extended period of time with increased potential for a further rate hike 

Today the Bank of England's MPC voted to maintain UK Interest Rates on hold for the second time in a month at 5.25%, as widely expected by more than 80% of economists polled by Reuters. The MPC committee members voted in a similar pattern as last time around, with 6 members voting to maintain rates at 5.25% whilst 3 members voted for a 0.25% increase. That being said, the MPC did state their expectation that their monetary policy will need to remain ‘restrictive’ for an extended period of time despite the weaker economic outlook for the UK. 

What are the latest UK Interest Rate forecasts?

The latest statement from the Bank of England has tempered the previous view amongst most market participants somewhat that UK Interest Rates have likely hit a peak at 5.25%. Whilst the markets still believe that UK Interest Rates are at or close to their peak, the chances for a further 0.25% rate hike has increased. That shows the BoE believes the war on inflation remains far from won yet despite the improvement in inflation data and any chance for an earlier than expected rate cut seems far from reality right now. 

Certainly what has changed in the past 24hrs is the expectation of when UK Interest Rates might fall. Previously it had been predicted that UK Interest Rates were likely to stay at 5.25% until the summer of 2024 where we might then see a small rate cut to around 5.00% by the end of 2024, with rates falling further to 4.75% in 2025. Those predictions have now been pushed further out, with the latest UK interest rate forecasts being that interest rates will likely now stay at around 5.25% until Q4 2024 after which they might see a small 0.25% rate cut. 

The clear message from today’s Bank of England MPC rate announcement seems to be that rates will continue to stay high for longer and rates are more likely to rise in the near term rather than get a cut, especially if UK inflation fails to cool down significantly in the coming months. Make no mistake, whilst still small, the chances of another Christmas rate hike has increased today.

31st October - 80% of economists convinced UK Interest Rates will remain on hold at 5.25% in BoE decision on Thursday 2nd November

Economists around the UK are united in their rate forecasts that the Bank of England will keep UK Interest Rates on hold at 5.25% when the central bank's MPC meets to decide on UK rates on Thursday 2nd November. Data compiled by Reuters showed that around 80% of economists polled expect UK rates to stay at 5.25% whilst 20% forecast UK Interest rates to rise by 0.25% to 5.5%. 

It remains that the Bank of England continues to attempt to strike a fine balance between supporting fragile UK economic growth whilst also helping to cool uncomfortable levels of UK inflation, which exceeds the bank's 2% target. 

Here’s XTB’s Chief Market Analyst Walid Koudmani’s UK Interest Rate forecast for Thursday’s big decision.

“At this stage, it would be a shock to the markets should the Bank of England hike interest rates again on Thursday. The vast majority of the market is convinced that the BoE will keep rates on hold for another month and adopt a wait and see approach to UK inflation data. We’ve seen two months of relatively positive developments on UK Inflation but with the conflict in the Middle East threatening to induce another wave of inflationary pressures to Europe thanks to higher oil prices, the Bank of England cannot be too aggressive here. 

Most likely the UK Interest Rate forecast continues to be that Interest Rates have already hit their ceiling at 5.25% and will likely stay at current levels until mid-2024 where we might start to see some minor rate cuts. UK Interest Rates are likely to fall from there but are predicted to level off at around 4.5% in 2025. So in the medium term, we should continue to expect rates staying much higher than we have gotten accustomed to in the past decade.”

23rd October - UK Interest Rates forecast to remain at 5.25% with predictions that UK Interest Rates won’t start to fall until the summer of 2024. 

The latest UK Interest Rates forecasts from various economists and data compiled by Bloomberg predict that UK Interest Rates will remain at 5.25% (current levels) for the time being and this is unlikely to change unless UK Inflation fails to show signs of a continued cooldown in prices. 

The latest UK Interest Rate predictions mark a departure from previous forecasts which indicated UK Interest Rates could peak above 6% though these predictions came at a time when UK Inflation was running significantly higher than the levels economists had expected. Inflation has shown signs of a continued cooldown in recent months, with price growth declining from a high of 11.1% in October 2022 to 6.7% in September. UK Inflation remains much higher than the Bank of England wants, with the BoE targeting a 2% inflation rate which is seen as supporting sustaining economic growth.

 What are the latest UK Interest Rate forecasts?

The latest projections for UK Interest Rates are as follows according to data compiled by Bloomberg and various economists:

UK Interest Rates have now likely peaked at 5.25% and they are expected to remain at current rates for some time. They are not expected to rise further - unless UK Inflation remains stickier - and are predicted to fall in the second half of 2024. The current market expectations for the Bank of England MPC meetings - which sets out the latest UK Interest Rate - is noted below (please note that the below market projections are always subject to change and are data dependent):

Bloomberg Chart - UK Interest Rate forecasts (Implied Rate Policy Rate Change)

What could affect the above predictions for UK Interest Rates?

Much fo the above is shaped by current expectations of UK Inflation with stickier inflation likely to force the Bank of England to keep rates higher for longer, whilst a sharp cooldown in price growth closer to the BoE’s 2% target could raise hopes that interest rates could be cut to spur fragile economic growth within the UK economy. 

Interest Rates were kept on hold in July - when much of the market had expected rates to continue rising - after inflation data showed that price growth was cooling slightly faster than initially expected. As XTB’s Chief Market Analyst notes below in his comments, that sent a strong signal to the markets:

Koudmani commented: “The fact that the BoE took its first set of positive UK Inflation data in such an immediate way - by keeping rates on hold - sends a firm signal to the market that the BoE will only hike rates if the data forces it too. That makes a case now that when there is a 50/50 call to be made, the BoE is most likely to keep rates on hold or cut as opposed to play it conservatively and hike. They’ve firmly shown their hand in the July rate setting meeting and this is something that the market must heed. 

What we need to see is a consistent decline in growth of prices within the UK to force the Bank of England to cut UK Interest Rates. That means we need to see UK inflation fall to below 4% before we are likely to see any move lower in UK Interest Rate forecasts and that remains far from certain due to a variety of reasons. In the immediate picture we still see supply constraints which are keeping UK production costs high. Moreover, wage growth remains at significantly elevated levels  and these are ultimately being passed onto the consumers and is a clear threat to making UK Inflation much more sticky than initially expected. That could mean inflation runs higher for longer and would as a consequence force the Bank of England to keep Interest Rates high into 2024 and 2025.”

21st September - UK Interest Rates kept on hold at 5.25% in shock to financial markets. Is this the peak for interest rate rises? Latest Analysis

The BoE’s MPC kept UK Interest Rates on hold today in a big surprise to investors and economists who had largely expected the central bank to make a 15th consecutive rise in rates of 0.25% to 5.5%. The news sent the GBPUSD forex pair sharply lower to levels not seen since March 2023 as investors sold out of the pound in reaction.

Chart - The path of UK Interest Rates since 2014

Why has the Bank of England kept UK Interest Rates on hold?

The BoE has largely decided to adopt a wait and see approach when it comes to future interest rates after positive inflation data out yesterday showed price growth surprisingly cooled in August. The UK central bank has taken this as evidence that higher interest rates are already working enough to bring down price growth and it’s clearly concerned that further rate hikes might be deemed unnecessary at this time. More rate hikes hurt economic growth as it makes borrowing costs more expensive and encourages individuals to save money as opposed to spending it. Whilst this should help curtail the demand side effects that are driving inflation, it also saps economic activity and as such, the BoE is concerned that its efforts to bring inflation back under control could have broader implications for the medium term health of the UK’s economy. This is why the MPC is now hesitating towards making further interest rate hikes. That being said, it was a close call, with 4 out of the 9 members of the MPC voting to hike rates in today's meeting.

What does this news mean for UK Interest Rate forecasts?

Investors and economists alike are rapidly changing their interest rate forecasts in reaction to today’s BoE decision to hold interest rates at 5.25%. Before today it was broadly forecast that UK Interest rates would peak at around 5.75% by the start of 2024 and stay there until the second half of 2024 where we could start to see smaller rate cuts of around 0.25% to 0.5%. This would result in UK interest rates falling to around 5% by the end of 2024 and 4.5% by the summer of 2025. 

The latest UK Interest Rate forecasts have now changed with most economists expecting UK Interest rates to peak at around 5.5% before falling to around 4.75% by the end of 2024 and 4.25% by the summer of 2025.

XTB’s Chief Market Analyst Walid Koudmani commented:

“Today the Bank of England published its interest rate decision which seems to have been a "close call" as recent strong wage growth indicated that a hike was almost certain and the market was pricing the probability of such a move at 70%. However, yesterday's inflation reading caused the probability of a hike to drop.

The actual decision turned out to be a surprise - rates were left unchanged at previous level as 5 MPC members voted to keep them unchanged while 4 MPC opted for a hike while governor Bailey was among those who voted for a no change in rates. The central bank also decided to cut gilt-purchases by 100 billion GBP over the next 12 months.

While rates were left unchanged, the BoE cautioned that further tightening is required if inflation persists which leaves investors in a precarious position as GBP took a hit on the decision with GBPUSD moving to a fresh daily low near 1.2234. The key message today is that rates are at their peak or close to it but with current data, it could be a dangerous signal to send the markets since if inflation keeps running hot, the BoE will need to hike once more and will look like they are chasing the curve yet again. Everything will depend on data coming out in the next few months and while inflation has shown signs of slowing, it remains unclear if it will continue this downtrend or force the BoE to make an instinctive move.”

20th September - UK Inflation surprisingly falls in August to 6.8%. Could help convince the Bank of England to pause interest rate hikes

Data out from the Office of National Statistics today showed a surprising fall in UK inflation growth from 6.8% to 6.7% in August when most economists had forecast a rise to 7%. Importantly, core inflation - which strips out the more volatile items such as energy and food - cooled sharply to 6.2%, which far exceeded initial expectations. The inflation data raises hopes that the cooldown of price growth in the UK could start to accelerate.

What does this improved UK Inflation data mean for UK Interest Rate forecasts?

Most economists remain convinced that the Bank of England will still hike UK interest rates from 5.25% to 5.5% in tomorrow's MPC meeting (at 12 noon). That would result in a fifteenth consecutive interest rate hike, with rates at their highest levels since early 2008. There are however now more doubts as to the steps for UK Interest Rates thanks in part to this positive inflation surprise, as discussed by XTB’s Chief Market Analyst Walid Koudmani below:.

Walid Koudmani commented:

“Make no mistake, this is a positive surprise. UK Inflation continues to see higher prices than most of the rest of the G7, which is a clear and present threat to UK economic growth. So the fact we are now seeing an accelerated cooling of core prices will do much to give the Bank of England pause for thought. 

The BoE now faces a tough decision; do they continue to hike rates to help maintain this cooling of UK inflation or pause interest rate hikes to see which way the data points in the coming months? There is no easy choice because it’s clear from the data that UK inflation retains some heat. Average UK earnings remains at record levels and can help seed second round effects of high inflation which has the ability to keep price growth higher for longer. Nevertheless, higher rates damages economic growth and we’ve already seen substantial interest rate hikes already throughout 2023. It was claimed - by me and many others - that the Bank of England was far behind the inflation curve at the start of 2023. There is every chance that if they decide to continue to raise UK Interest Rates now that inflation has started to cool faster, they could be accelerating past the curve.”

Chart - UK Inflation surprisingly falls in August to 6.7% which could help convince the BoE to take a pause from hiking UK Interest Rates

Chart - UK Core Inflation (which excludes volatile items such as energy and food) cooled sharply to 6.2%, adding weight to the argument that the Bank of England might refrain from further interest rate hikes above 5.5%

12th September - UK wage growth continues to grow at record pace of 7.8%, increasing chances of higher UK Interest Rates in September

Data out from the Office of National Statistics on Tuesday 12th September highlighted the sustained pressure that wage growth may be having on UK Inflation. Annual growth of average pay excluding bonuses remained unchanged in July at 7.8%, which is the highest pace of wage growth since records began in 2001. Total pay including bonuses rose at a pace of 8.5% with much of this boost coming from pay settlements with NHS and civil service workers to end their respective strikes. However, this pay growth of 8.5% was stronger than economists had expected, with much of the market forecasting an unchanged reading of 8.2%. 

What does this strong UK Wage earnings data mean for UK Interest Rates?

UK Interest Rates are widely predicted to rise from 5.25% to 5.5% when the Bank of England’s MPC next meets on 21st September 2023. If economists were looking for clues which might convince members of the MPC to pause its current interest rate hiking cycle, this set of wage data didn’t provide it. Wage growth adds further upward pressure to inflation as it increases business costs which ultimately get passed onto consumers in the form of price rises. This is why the Bank of England takes wage growth data seriously in its economic outlook. Importantly however, wage growth is now outstripping inflation meaning the average worker is finally seeing a change in their real income, something not seen for many years outside of the Covid era. 

That being said, the UK unemployment rate rose - as expected - to 4.3% with around 207,000 people out of the workforce in July which was slightly more than expected. This ultimately may give economists confidence that wage growth at current levels might not be sustainable as with a rising number of people out of work, employers won’t have to offer the current levels of higher wages to attract talent for much longer.

16th August - UK Inflation slows to 6.8% in July but not enough to stop UK interest rates hitting 5.5% in September, analysts say

UK Inflation slowed to 6.8% in July, marking a continued cooling of UK inflation from the highs of 11.1% in 2022. Yet the slowdown was widely expected as most economists had forecast July should show UK inflation cooling to 6.8% thanks to a sharp drop in gas and electricity prices. On the outset, it's positive to see UK inflation remain in slowdown mode and cooling in much of the trajectory that analysts expect - having failed to cool in the speed most people had forecast in the first half of 2023. UK inflation is now at its lowest level since February 2022 and remains on track to hit around 5% before the end of 2023. 

Chart - UK Inflation continues to fall, with price growth cooling to 6.8% in July

Core Inflation continues to be a headache

The troubling aspect in the UK inflation data reading concerned Core Inflation. UK Core Inflation - which strips out volatile items such as energy and food - remained at 6.9% when price growth had been predicted to slow to 6.8%. Core inflation remains elevated with price growth remaining between 6.8% and 7.1% since April 2023, meaning prices continue to rise at a steady rate across many products and sectors. Now when you combine this aspect with the extremely strong UK Wage growth data out on 15th August, where wages grew by 8.2% and far higher than most economists had expected.

Chart - UK Core Inflation remains elevated and troublesome

What is the current UK Interest Rate forecast? And when might UK Interest Rates start to fall?

According to Bloomberg data, the market is 99% convinced that the BoE will hike UK interest rates by 0.25% to 5.5% when it next meets on 21st September. And what’s more, the market continues to price in at least 1 or 2 more rate hikes between November 2023 and January 2024, with UK interest rates expected to hit a peak of between 5.75% and 6%. The July Inflation data is unlikely to do much to deter the Bank of England’s MPC members from refraining from further interest rate hikes in the next three months. For the BoE to pause its current cycle of hiking UK Interest rates, it is likely we will need to see Core Inflation start to decline much more markedly than we have seen in recent months and UK Wage growth start to cool. Stubbornly high core inflation is an example of price rises becoming much more sticky and longer term whilst wage growth poses a threat to medium term inflation remaining elevated as business costs rise and  ultimately firms need to hike prices to maintain profit margins. Until the BoE starts to see those trends, it's very likely that UK Interest Rates will remain higher for longer. It’s for this reason that the market is not expected to see any UK rate cuts until well into 2024.

15th August 2023 - Record UK wage growth pace heightens chances of UK inflation running higher for longer

Data from the Office of National Statistics on Tuesday 15th August shocked the markets to print a record regular wages growth for the UK, with average earnings rising 8.2% in June from 7.2% in May (on an annual basis). That was far stronger than the market had expected, which was a smaller wage growth rise to 7.3%. Excluding bonuses, regular pay growth jumped to 7.8% against expectations of a drop to 7.4% (from 7.5% in May).

Chart - UK Average Weekly Earnings growth hits 8.2%

Source: Trading Economics

What does this wage growth data mean for UK Interest Rate forecasts?

Stronger than expected wage growth is a clear sign of secondary effects from rising inflation and further evidence that UK inflation is likely to stay higher for longer. In an effort to retain staff who are demanding more pay amidst the cost of living crisis, employers are having to offer higher wages to keep staff. By doing so, this increases the typical business operating costs which ultimately get passed to the consumer through rising prices, thereby seeding inflation into the UK economy more broadly and for the longer term. In essence, strong wage growth likely makes higher inflation stickier and therefore it forces the Bank of England to keep rising UK interest rates to help cool the demand side effects that it believes is a major part of what's driving UK inflation.

Markets are pricing in a 99% chance of UK Interest rates rising by 0.25% to 5.5% in September’s MPC meeting

It’s worth noting that on the back of stronger than expected UK wage growth data, the financial markets are now pricing in a 99% chance that UK interest rates will rise by 0.25% in September 2023 to 5.25%.

3rd August 2023 - UK Interest Rates rise to 5.25% in latest Bank of England move to curtail UK inflation

The Bank of England’s MPC moved to increase UK interest rates for a 14th consecutive time on 3rd August, by hiking rates to 5.25% - an increase of 0.25%. This increase was anticipated by the financial markets after recent UK inflation data showed prices had started to cool faster than expected. This latest rise means UK interest rates have now hit a new 15 year high. 

UK Interest Rates are forecast to hit 5.75% - 6% by end of 2023

The current forecasts by economists and the markets alike remain that UK interest rates are expected to peak at between 5.75% and 6% by the end of 2023 or start of 2024. UK interest rates are not expected to fall until mid 2024 and are likely to fall to around 4.5% by 2026.

25th July 2023 - UK Interest Rates are forecast to rise as high as 5.75% by the end of 2023 before falling in 2024 - latest predictions

The latest set of UK Inflation data - which showed that UK price growth in June was slowing at a faster pace than initially expected - has convinced economists and financial markets to re-evaluate their forecasts for how high UK Interest rates may rise in the next six months. Only a few weeks ago it was expected that UK Interest Rates would likely rise as high as 6.5% by the first quarter of 2024. Now those forecasts have been reworked and financial markets are predicting UK interest rates will rise between 5.75% and 6% by Q1 2024. 

Chart: Bloomberg Implied UK Interest Rates 

Here you can see how the implied UK interest rate has changed markedly in July (green line) compared to original forecasts in June (yellow line). As of 25th July 2023, UK Interest Rates are now expected to rise from 5% in July to a high of around 5.75% in January 2024. 

When might UK interest rates start to fall?

UK Interest Rates are now expected to fall towards the end of 2024 and well into 2025 after hitting highs of around 5.75% to 6% in the first three months of 2024. Economists are now expecting UK interest rates to remain around 5.50% to 5.75% for most of 2024 before starting to fall at the end of the year. UK Interest Rates are expected to fall by around 0.75% to 5% by mid-2025 and even further into 2026 where they are forecast to settle at around 4.5%.

When is the next Bank of England interest rate meeting and what are markets forecasting?

Below we list the key Bank of England MPC meeting dates and how interest rates might now rise at each meeting with the latest data:

  • 3rd August 2023 - a rise of 0.25% could bring UK interest rates to 5.25%
  • 21st September 2023 - a rise of 0.25% could bring UK interest rates to 5.50%
  • 2nd November 2023 - a rise of 0.25% could bring UK interest rates to 5.75%
  • 14th December 2023 - a rise of 0.25% could bring UK interest rates to 6.00% or the BoE could keep rates on hold at 5.75%

19th July 2023 - UK Inflation surprisingly slows faster than expected in June, increasing hopes that UK interest rates won’t need to rise to as high at 6.5% 

Data out on 19th July showed UK inflation cooled faster than expected in June, falling from 8.7% to 7.9%. Economists had predicted prices growth to slow to 8.1%. Core inflation - which strips out energy and food - also slowed surprisingly to 6.9% when the market had expected prices growth to remain at 7.1%. 

Why is it important to see UK inflation cooling?

It’s important on two fronts; first, because core inflation is finally coming down. Core inflation is seen as a better barometer of inflation because it strips out volatile items such as energy and food. So the fact that core inflation is now falling raises hopes that UK inflation may now start to cool off faster and broader than in the previous months. Second; this is the first data set out of the UK in many months which has shown inflation has declined faster than initially expected. Previously most UK inflation data and wage data has come in higher than economists expected. If we start to see inflation come in lower than forecast in the coming months, that will do much to change the guidance from the Bank of England and would raise hopes UK Interest rates won't need to go as high as 6.5%.

XTB’s Chief Market Analyst Walid Koudmani on whether this UK inflation reading might affect UK Interest Rate hikes:

“Make no mistake, this is a positive inflation reading but it's too early to warrant a dramatic change in forecasts for UK Interest Rates. Whilst it's great to see inflation fall faster than expected and core inflation is also finally falling, we cannot take one month of data in isolation. The general trend for UK inflation remains that it's much stickier than initially expected and as a consequence, UK interest rates will need to rise higher and faster to combat this. The market is still expecting UK interest rates to rise by 0.5% to 5.5% in August. I don’t believe the recent UK inflation data will change that outlook right now. However, if we do start to see July and August inflation data cool faster than expected with UK wage growth also pausing, that will do much to convince us that UK Interest Rates may not need to rise to 6.5% at the start of 2024.” 

11th July 2023 - UK Interest Rates forecast to rise to 6.5% by start of 2024

UK Interest Rates are now predicted to rise to 6.5% by the start of 2024 after another surprising jump in average earnings. Data out today, showed UK average earnings including bonuses rose by 6.9% in May against expectations of a smaller rise to 6.8%. Excluding bonuses, earnings jumped to 7.3% when a fall to 7.1% had been expected, reaching record levels after the previous month's rise was adjusted to 7.2%. 

What does higher average earnings mean for UK Interest Rate rises?

Higher than expected growth in average earnings paints a troubling picture as it shows inflation is becoming firmly entrenched in the UK economy with labour shortages forcing businesses to pay staff more to retain them against the cost of living crisis. This is known as secondary effects from high inflation and historically can result in inflation remaining higher for longer. 

What are the latest forecasts for UK interest rates and how high could they go?

The latest predictions from economists are that UK Interest rates are now expected to peak at 6.5% in the first quarter of 2024. This marks a stark change in tone from forecasts earlier in 2023 when UK Interest Rates had been expected to peak at around 4.5% by the end of the year. Below we list the keep Bank of England MPC meeting dates and how interest rates might rise at each meeting:

  • 3rd August 2023 - a rise of 0.5% could bring UK interest rates to 5.5%
  • 21st September 2023 - a rise of 0.25% could bring UK interest rates to 5.75%
  • 2nd November 2023 - a rise of 0.25% could bring UK interest rates to 6.00%
  • 14th December 2023 - a rise of 0.25% could bring UK interest rates to 6.25%
  • 1st February 2024 - a rise of 0.25% could bring UK interest rates to 6.5%

How are the latest data affecting UK Mortgages?

IMPORTANT! The latest data shows average 2yr fixed mortgages have now risen to 6.6%, which exceeds the levels reached during the budget crisis last year. Average 5yr fixed mortgages are also now listing at above 6%. If you are looking to renew your fixed term mortgage deal in the coming months, you will likely face a significant jump in costs. 

Update - 22nd June 2023: UK Interest Rates rise to 5%. Could now hit 6.5% by end of 2023 / start of 2024

The Bank of England’s MPC (Monetary Policy Committee) increased UK Interest Rates by more than expected to reach 5% on 22nd June 2023, a rise of 0.5%. This was the 13th consecutive interest rate rise and the highest for 15 years as the BoE fights to cool UK inflation which continues to exceed economist expectations and remain high. Data out this week showed UK Inflation remained at 8.7% when it had been expected to cool to 8.4%. Importantly core inflation (which strips out energy and is seen as a better indicator of price pressures) rose to 7.1% in a surprising development when core inflation had been expected to remain at 6.8%. Thanks to these inflation figures, it was widely expected that the BoE would have to raise interest rates further.

With UK inflation remaining stubbornly high, economists now believe UK Interest rates are likely to hit 6.5% by the end of 2023/start of 2024.   

Why are the Bank of England raising interest rates?

The BoE are increasing interest rates in an effort to cool demand side effects to inflation. Higher interest rates increase the cost of borrowing and debt, meaning consumers have less of an incentive to borrow money for credit cards, loans or mortgages. Higher interest rates also means you earn more money for your bank deposits and bonds, so it incentivises you to keep money at the bank and not spend it. Therefore, higher interest rates are an attempt to cool prices by weakening demand. There is a debate raging however, that UK inflation remains high not simply due to demand aspects but thanks to continued supply shortages due to post-Covid and Brexit, which opens the possibility that the Bank of England cannot fight UK Inflation on its own and that there needs to be a combined effort with the UK Government in terms of optimising supply constraints to help bring inflation back down. Remember the Bank of England has a 2% inflation target which it must meet as part of its mandate.

What is the impact on mortgages?

This week the average 2 year fixed mortgage rate hit 6% which was the highest level since December 2023. There is every expectation that average fixed mortgage rates will continue to rise with UK interest rates set to rise further and after UK 2-year Bonds Yields (Gilts) rose to 5.12%. This marks a significant rise since March 2023 when the same bond had a yield of 3.5%. With more than 400,000 fixed rate mortgages set to expire between July and September, these borrowers are set to suffer renewals at materially higher mortgage rates that they have been used to. 

IMPORTANT! Currently UK interest rates are forecast to peak at around 6.5% by the end of 2023 or start of 2024, which is far higher than initial predictions at the end of 2022, which were closer to 4.5%. Please consider how higher interest rates might affect your borrowing and mortgages.

What are the thoughts of XTB's Chief Market Analyst?

Chief Market Analyst Walid Koudmani commented: "There's been a dramatic change in the market view on UK interest rates in the last two months. At the start of the year, we had expected UK interest rates to reach around 4.5% by the end of 2023. Today, we now expect that UK rates could peak at 6.5% by Q1 of 2024 which marks a substantial material change."

So what's driving that change? 

He continued: "Simply put, UK inflation has remained far more stubborn than initially expected. Core inflation - which strips out energy - rose to 7.1% in May which was a shock. In addition, we are seeing a growth in average earnings which can be viewed as secondary effects of inflation i.e. workers demanding higher wages due to inflation. That has the effect of entrenching high inflation in the UK economy for longer, due to business costs rising and companies increasing prices to maintain profit margins. What the Bank of England is therefore attempting to do is hike UK interest rates aggressively in an attempt to dampen demand side effects, which are driving prices higher. Higher rates naturally make debt increase and encourages people to take less risk. BoE's plan A was to consistently increase UK interest rates. That plan has failed with inflation remaining stubbornly high despite dramatic falls in wholesale energy prices. So what's plan B? Plan B for the BoE is to aggressively rise rates more than the market had initially expected. They need to raise the bar. That's why we saw a shocking 0.5% rise in rates today, and why we should now expect stronger rate hikes going forward."

What about the impact on mortgages?

"It's not looking good. We know there are around 400,000 fixed mortgage deals set to expire in the next few months and those mortgage holders will inevitably be switching to deals at far higher rates than they are used to. We've already started to see hundreds of mortgages pulled from the marketplace due to credit institutions not wanting to take on extra risk given the clouded performance of the UK's economy and volatile debt markets (the yield on 2 year UK Gilts rose to 5.3% which is a new 15-year high). The average two year fixed mortgage rate is now exceeding 6% and with every rise in UK interest rates, those rates are expected to go even higher. We could be seeing an average 2-yr mortgage deal rise to 6.5% sooner than later"  Walid explained. 

Update - 13th June 2023: UK wage growth increases chances of UK Interest Rates rising to more than 6% by end of 2023

Data released on 13th June 2023 showed a strong growth in UK wages, with annual pay for all employees rising to 6.5% which was much faster than expected. Most economists had predicted wages to rise to 6.1%. What’s more, private sector wages grew by 7.6% which is a record pace outside of the Covid era. 

Why is wage growth data important when it comes to UK interest rates?

UK interest rates are rising as a key tool used by the Bank of England in their efforts to cool 40-year high UK inflation. By raising interest rates, the UK central bank expects that inflation should subside by cooling demand side aspects (by making borrowing more expensive and encouraging people to save money by earning higher interest on their deposits). This is why UK interest rates have risen from 0.1% in November 2021 to 4.5% in May 2023. 

The data concerning wage growth poses a risk to entrenching inflation further by heating the demand side aspects, as workers are earning more money and ultimately will likely spend more. That’s why on the back of this data, two year UK Gilt yields (the interest on UK bonds) rose to 4.81% which is higher than the levels reached after former Prime Minister Liz Truss’s car crash mini-budget. Thus highlighting the real expectation in the market that UK interest rates are expected to rise to 4.75% when the Bank of England’s MPC next meets on 22nd June 2023 with the financial markets now also projecting UK interest rates could peak between 5.75% and 6% by the end of 2023, which would be their highest levels since 2007. 

Update - 24th May 2023: UK Inflation in April cools to 8.7% but still exceeds BoE forecasts, increasing chances of more UK interest rates hikes

Data out on 24th May 2023 showed UK inflation continues to exceed expectations despite finally showing signs of cooling. In April 2023, inflation slowed from 10.1% to 8.7% which was a marked slowdown and mostly driven by sharp falls in wholesale energy prices. However, inflation had been expected to slow much faster to 8.2% and so the fact inflation continues to track above market consensus is having an impact on UK interest rate forecasts. The Bank of England has already indicated that should inflation fail to fall as fast as they predicted, the central bank has further room to hike interest rates in their efforts to bring inflation back towards its 2% target. With inflation now exceeding BoE forecasts in both March and April, economists and analysts alike are more convinced that we could see between 3 and 4 more rate hikes in the UK of 0.25%. This could mean UK interest rates could now hit 5.25% in 2023, which could have a significant impact for borrowers and mortgages.

XTB’s Chief Market Analyst Walid Koudmani commented, “The UK inflation data released today surprised many analysts, indicating a slower than expected drop which once again may be shifting expectations for the upcoming rate decision by the Bank of England. It has become increasingly likely that the BoE will raise interest rates more than previously expected to a terminal rate of 5,25% or even 5,50% in a desperate attempt to contain an inflation that has slowed much less than previously planned for.

However, it is important to note that due to a number of factors, inflation is still at a very high level, and it is likely to remain elevated for some time. While some aspects of the report showed promising signs, mainly due to the base effect, the situation remains quite pessimistic in the short term as a result of the noticeable impact the war in Ukraine and Brexit policies have had on the UK economy. The Bank of England now has a tricky task at hand, it is likely to continue to raise interest rates in an effort to bring inflation under control, but this could lead to a further slowdown in economic growth.

While the pound has failed to rebound following today's reports, with the GBPUSD pair still trading around 1,238, expectations of a further increase in interest rates by the Uk central bank may boost the pair in the future. 

In any case, it appears that the UK economy continues to be one of the worst performing of the G20 while we have seen a potential shift in approach from the FED and some uncertainty regarding the upcoming decisions by the ECB.

Update - 11th May 2023: Bank of England Hikes UK Interest Rates to 4.5% - May 2023

On 11th May 2023, the Bank of England’s MPC raised UK interest rates yet again to 4.50%, a rise of 0.25% and lifting UK interest rates to their highest level since 2008. This rise was much expected by market experts and economists after recent data showed that UK inflation remained stubbornly high and had not subsided as fast as previously expected by the UK’s central bank. Inflation for March tracked at 10.1%, far higher than original expectations for a slowdown to just above 9% despite significant declines in wholesale energy prices. As a consequence, this forced the BoE to continue hiking UK interest rates and this decision marked its 12th consecutive rise in UK interest rates since December 2021. 

Comment from XTB’s Chief Market Analyst Walid Koudmani: 

The Bank of England’s MPC today hiked UK interest rates yet again to 4.5%, a rise of 0.25% and lifting UK interest rates to their highest level since 2008.

This latest rate hike was much expected by the market and had been effectively priced to the strength of the pound after recent data showed that UK inflation remained stubbornly high and had not subsided as fast as previously expected. As a result we did see a small jump in the GBPUSD exchange rate yet this move was not significant given the rate continues to trade close to 1-year highs.

The market focus now turns to the future path of rate decisions and it's here where there remains a big question. We already know wholesale energy prices have collapsed much faster than initially expected, with spot natural gas prices trading 50% lower than in February with equally sharp falls in futures prices. This should quicken the pace of inflation cooling in the coming months which could convince the BoE to refrain from a thirteenth consecutive hike. But it should also be noted that food price inflation in particular remains stubbornly high, whilst wage growth and strong employment might keep inflation temperatures warm. In today's MPC decision, the committee admitted that it would have to hike rates even further if these conditions persist so that leaves the door ajar for more hikes.“

The key changes to UK interest Rates since 2021

Since December 2021, the BoE’s MPC has announced multiple interest rate hikes (rises) in an effort to help combat historically high levels of UK inflation, which rose to more than 11% and far exceeding the BoE’s target of 2%. Between December 2021 and May 2023, there has been 12 consecutive rises in the UK interest rate, which has pushed the base interest rate from a low of 0.1% in November 2021 to a high of 4.5% in May 2023, with the potential for further hikes now open for debate by economists and analysts. Some of the interest rate hikes have been significant, with the MPC voting to hike rates by 0.75% once and by 0.5% four times within this latest hiking cycle.

Chart - UK Interest Rates over the past 10 years

Trading Economics Chart Showcasing Inflation SpikeSource: Trading Economics

The Economic Outlook driving UK interest rate hikes

The BoE's Monetary Policy Committee (MPC) sets the UK interest rates based on its assessment of the economic outlook and the inflation risks. The MPC's primary objective is to maintain price stability in the medium term, defined as the two-year horizon. However, the MPC also considers the impact of its policy on the broader economy, including growth, employment, and financial stability.

The UK economy had suffered a severe contraction in 2020 due to the Covid pandemic and the associated lockdowns, but it has since emerged in a stronger shape as the UK economy and the global economy has opened back up. 

There are two major macroeconomic aspects influencing the current UK interest rate path; inflation and unemployment.

  1. Inflation - a core KPI of the Bank of England’s primary objective is to target inflation at 2%, which is seen as helping to support stable growth and price stability. Unfortunately, UK Inflation has far exceeded the BoE's 2% target rate, reaching a 41 year high of 11.1% in October 2022 on the back of rising energy and food prices. The impact of the Russian invasion of Ukraine and subsequent economic sanctions has driven a near 130% jump in the price of gas, whilst electricity prices also rose by more than 60%. Food price inflation has also had a strong impact of overall inflation, with supply shocks remaining from the Covid pandemic and creating an imbalance between demand and supply of goods, pushing prices higher as a consequence.
  2. UK Employment - the employment rate in the UK has remained stable at around 75%, which has resulted in a jump in earnings as employers have been forced to increase workers wages to retain staff amidst the backdrop of rising prices and a cost of living crisis in the UK. This has also played a role in keeping uk inflation high.

When does the Bank of England expect UK inflation to fall?

The BoE expects UK inflation to fall sharply this year from more than 10% to around 4% by the end of the year. They base this belief on three core factors:

  • Wholesale energy prices have fallen quickly thanks to the UK and other developed economies building stable source of energy away from sanctioned nations
  • Imported goods prices are expected to fall as many of the Covid induced supply constraints ease and the UK begins to import goods faster and at higher volumes
  • Demand side spending constraints as consumers will have less money to spend due to rising costs, which should temper demand side price pressures 

Many economists and banks in fact expect UK inflation could fall back even more to just above 2% by the end of 2023. In February, Citigroup published a report which suggested the UK inflation rate could fall to 2.3% in November 2023 whilst Investec forecast inflation at 1.6% by December. Yet recent inflation data published by the Office of National Statistics (ONS) showed UK inflation remained stubbornly high in March, slowing to 10.1% from 10.4% when a sharper slowdown has been forecast by most economists. In April, inflation cooled to 8.7% yet was predicted to slow much faster to 8.2%, highlighting that UK prices remain hotter than most economists had hoped.

Chart - UK inflation over the past 10 years

UK inflation has traditionally ranged between 0% and 3% between 2013 and 2021. However soaring energy prices from the Russian invasion of Ukraine and supply issues helped to push UK inflation to record highs of 11.1% in October 2022. Recent months has seen UK inflation cool with prices slowing to 10.1% in March and 8.7% in April.  

Trading Economics Chart Inflation Spike Source: Trading Economics

Potential scenarios for UK interest rates over the next 5 years

Data compiled by Bloomberg have highlighted how in recent months expectations for higher UK interest rates have risen due to the fact UK inflation remains higher than forecast. The current plot graph indicates that UK interest rates could peak at or close to 5.25% within the next six months before falling sharply to around 4.5% by the first quarter of 2024. This is now higher than the implied UK interest rate merely a month earlier, which had originally expected to peak at around 4.5%. After hitting a new high of 5.25%, UK interest rates are expected to fall sharply in the coming two years with rates possibly between 3.5% and 4% in 2024 before falling to between 3% and 3.5% in 2025. UK interest rates are expected to stabilise between 3.0% and 3.5% between 2025 and 2027.

Chart - Bloomberg implied UK interest rates until 2027

bloomberg UK interest rate forecastSource: Bloomberg

The Impact of Rising UK Interest Rates on Mortgages

Rising interest rates can have a significant impact on UK mortgages, as they affect the cost of borrowing and the affordability of repayments. When interest rates increase, mortgage payments can become more expensive, which can put a strain on household budgets and affect the demand for new mortgages and housing.

Recently homeowners who have had to face remortgaging at significantly higher mortgage rates than their original deals as higher interest rates have driven a sharp increase in mortgage rates. Those owners who have seen their original fixed term deals expire in recent months have seen their new mortgage rates jump from less than 2% to more than 4% on average, which has added significant cost. Those on variable rates have also seen sharp increases in their mortgage costs each time the Bank of England has hiked interest rates since December 2021.

Rising interest rates can also affect the demand for mortgages and housing, as some borrowers may postpone their purchase or opt for cheaper properties or areas. This can have a knock-on effect on the property market, with lower prices, slower transactions, and reduced activity in related sectors, such as construction, renovation, and home improvement.

FAQ

Inflation is the rate at which prices rise and fall over a period of time. For example, if prices rise by 2.5% over the last year, annual inflation will be deemed to be 2.5%. Typically inflation is a weighted measure of a basket of goods and services with some having a larger influence over the total inflation rate than others. In the UK, inflation is tracked by the UK Office of National Statistics (ONS). 

Tracking inflation data is very important as it’s a key indicator of economic health and price stability. This is why many global central banks such as the BoE have an inflation target within their mandate. Learn more about inflation.

Typically high inflation results in proactive measures by central banks and price volatility amongst commodities and forex. This market volatility can create multiple trading opportunities if you have the right investment strategy and consider prudent risk management. You can learn more about investing during inflation

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