Naz Financial

A Personal Financial Blog from Naz Miller

What’s Happening With Interest Rates?

The Bank of England Base Rate has been held at 5.25% since August 2023 and inflation has eased to 4% p.a. There’s a lot of chatter about the possibility of interest rates coming down, so I thought I’d take a look this month at what may happen to interest rates and why.

Firstly, let’s look at the history of the Bank Rate, for context, before looking at what could happen in 2024.

What is the Bank of England’s Role?
.... And What’s the Bank Rate?

The Bank of England’s primary functions are to maintain monetary stability and oversee financial stability of the UK financial system. That means it controls monetary policy, one of the main tools of which are interest rates. It has a target of maintaining the rate of inflation at 2%.

Although the interest you pay to banks for loans or receive for savings are set by your banks, they are set in a competitive market, with other financial institutions. The Bank of England influences the level of interest rates generally, by setting the Bank Rate, also known as the Base Rate. (See Glossary)

The Bank of England also acts as the lender of last resort and as the custodian of the official gold reserves in the United Kingdom.

History of Bank Rate Movements

Right now, Bank Rate is 5.25%, a 16-year high.

However, the rate was higher than this for much of the 1980s and 1990s, and was running at 17% in November 1979.

After the latest meeting of policymakers, there were plenty of questions about why interest rates have not been cut, with the rate of inflation dropping sharply.

Inflation was running at 4% in January 2024. While that was down from a peak of 11.1% in October 2022, it is still twice the Bank’s target.

What’s Going to Happen in 2024?

Although the current Bank Rate has been held for some time now, since August 2023, there has been a lot of speculation about rate changes during 2024. Particularly in the press. Nothing is set in stone though.

Reasons to Expect LOWER Interest Rates in 2024

The general consensus seems be toward a series of small reductions during the year. In fact, if you look at Forward Interest Rates, they have shown reductions during 2024 for some time. That said, the Forward Rates show less of a decline than they did a couple of months ago.

Most economists seem to expect declines though. By the end of 2025, the expectation is for a Bank Rate of c.3%, so not as low as it has been in recent history.

According to the Guardian, ‘financial markets expect the Bank to begin cutting rates this summer from the current level of 5.25%, with a first reduction in borrowing costs anticipated from as early as June. Investors are pricing in a 17% chance of a cut in May, with the probability of a June cut at almost 50%.’

Reasons to Expect HIGHER Interest Rates in 2024

The fact that inflation is still double the target rate set for the Bank of England, means that there will continue to be pressure to increase interest rates. At the last Monetary Policy Committee (MPC) meeting, in January, 3 of the 9 members actually voted for an increase.

And there’s an election coming. The Government is expected to try and bribe voters with tax reductions in the forthcoming Budget (March 6th). If these are not fully funded in detail by the Chancellor, expect adverse market reactions, a run on sterling and all the other pressures that push interest rates up. Just as they did for the Truss/Kwarteng mini budget.

In conclusion, nothing is set in stone. Inflation has fallen (although it’s questionable whether the interest rate rises caused this, or world energy and commodity prices). So, there’s a widespread belief that rates will fall, although not to the low levels seen before 2022. As with all things in the world of personal finances, there will be ups and downs, consider your investments as being for the long term. Contact me for  a discussion of your circumstances and your exposure to interest rate fluctuations.

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As we come to the end of another economically tumultuous year, I’d like to take this opportunity to remind you of the personal finance topics I’ve covered in the past 12 months …

Naz Miller

I'm Naz and I'm a Financial Adviser. Prior to working in private practice, I spent 34 years working at Lloyds Bank in Cambridge and surrounding areas. My work has always focused on helping clients achieve their long-term financial objectives.

Glossary of Personal Financial Terms

AAA Rating

In short, AAA ratings (‘triple-A‘ ratings) are the highest credit rating available for an investment, such as a bond or company.

AAA ratings are issued to investment-grade debt that has a high level of creditworthiness with the strongest capacity to repay investors.

Similarly, the AA+ rating is issued by S&P (Standard and Poor) and is similar to the Aa1 rating issued by Moody’s. It comes with very low credit risk and indicates the issuer has a strong capacity to repay.