The Base Interest Rate Is Still High – But There Are Signs Change Is Coming

The Bank of England just kept base rates at 5.25% for the fourth time in a row.
Bank of England Governor Andrew Bailey
Bank of England Governor Andrew Bailey
JUSTIN TALLIS via Getty Images

The Bank of England has decided to keep the base interest rate at 5.25%, the same high level it’s been at since August despite falling inflation.

However, there were some hints that significant change is coming to our economy in 2024 after years of a gruelling cost of living crisis.

The base interest rate – which is the cost of borrowing money – is set by the Bank, and acts as a guide for lenders up and down the country.

It is the Bank’s primary means to control inflation – the rate at which prices increase over a 12-month period.

Inflation was spiralling out of control at the height of the cost of living crisis, peaking at 11%, until the Bank’s interest hikes finally had an impact.

However, inflation was still at 4% in December, which is double the Bank’s 2% target.

No-one knows for sure when this inflation versus interest battle will finally conclude, but there were a few keen signs from today’s decision that an end is in sight.

What does the Bank’s decision tell us about the interest rate?

The nine-member group which decides what to do with the interest rate, the Bank’s Monetary Policy Committee, was split over today’s decision.

Six members voted to keep it at 5.25%, two members voted for a hike, one for a cut to 5% – this is the first time the committee has been split in such a way since the 2008 financial crash.

The divide suggests the idea of cutting the interest rate is now a real possibility, for the first time since the pandemic.

Some market predictions even say the cut could come as soon as May, according to Sky News’ Ed Conway.

What did today’s decision tell us about inflation?

The Bank of England governor, Andrew Bailey, said it was “good news” that inflation had fallen from 10% a year ago to December’s 4%, showing that things were “moving in the right direction”.

The inflation rate was not expected to change until next year, but the Bank now predicts that inflation hit 3% in March and 2% target in April because “global shocks” like oil and gas prices, have fallen.

These are positive predictions – but the Bank is still being careful with the interest rate because it predicts inflation will rise again later in the year amid fluctuations in energy prices.

Bailey said they have to be “more confident” inflation will “settle” at its 2% target before they bring down the interest rate.

“We must get inflation back to the 2% target sustainably,” he added.

But, we will soon see the full analysis about how the economy performed in the latter half of last year – and the Bank says there is a near 50-50 chance there was a technical recession at the back end of 2023.

A technical recession is when there are two consecutive quarters where the economy shrinks.

And it’s hard for an economy to grow when interest rates are high.

What does all of this mean for you?

High interest rates meant many mortgages became more expensive over the last year, but the Bank’s optimism about falling inflation could mean stability returns to the property market.

Mortgage rates are expectedly to gradually fall across the year, spelling good news for first-time buyers and those remortgaging.

In fact, some lenders already cut their rates for mortgages even ahead of the interest rate decision.

But, it’s worth remembering the 1.5 million people remortgaging this year will still see a hike because rates are significantly higher than they were two years ago.

For people with variable rate mortgages, which move with the Bank Rate, there will not be any change.

Andy Mielczarek, Founder and CEO of financial company SmartSave, explained: “As seen with last month’s surprise increase, the fight to bring inflation back down is far from over, leaving UK households compelled to contend with the challenge of interest rates for a little while longer.”

Mohsin Rashid, CEO of data app ZIPZERO, said: “For millions across Britain, holding the base rate at this level equates to crippling debt and mortgage repayments – sinkholes on their road to financial recovery.”


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