Interest rates and inflation - what to expect for 2024
There is little doubt that the last few years have been tough financially for most of us. Inflation and interest rate rises have made things particularly hard. Will 2024 be any better?
- Will the UK base rate go down?
- How do interest rate changes affect my finances?
Mortgages
Personal loans and credit cards
Savings accounts and overdrafts
Perhaps there is some light at the end of the tunnel. Inflation has fallen recently. And, while the base rate has increased sharply at the start of 2022 from 0.25% to 5.25% in 2023, there have been no interest rate increases since the end of the summer. Here is a summary of how the rates have been changed during 2023:
Date Changed | Rate (%)
02 Feb 2023 | 4.00%
23 Mar 2023 | 4.25%
11 May 2023 | 4.50%
22 Jun 2203 | 5.00%
03 Aug 2023 | 5.25%
The next base rate review will be on Thursday, 1st of February 2024.
The question is, will interest rates decrease?
Will the UK base rate go down?
A key factor is inflation, a primary cause of the base rate increase. The Bank of England (BoE) has an inflation target of 2% set by the government. The Bank has been raising interest rates to slow price rises (inflation). The idea is that when overall spending is lower, inflation slows down.
Although inflation has fallen to 4.6% in October, it's still more than double the Bank's target. The main causes for high inflation, according to the BoE, are:
- The Covid pandemic which caused a shortage of products and services, quickly followed by high consumer demand.
- The war in Ukraine which impacted energy and food prices.
- The shortage of people available to work causing employment costs to rise and businesses to charge more for goods and services.
So when will inflation go down?
The governor of the Bank of England, in a recent interview with ChronicleLive, said: "I'm very conscious of the position of the less well-off, but we do have to get [inflation] down to 2% and that's why I have pushed back of late against assumptions that we're talking about cutting interest rates." According to the BoE, inflation is expected to "be back to more normal levels by the end of 2025. By normal, we mean that on average, prices are rising by around 2% a year."
That's not to say changes to interest rates and adjustments will not be made before then. BoE base rate changes are decided by the bank's Monetary Policy Committee (MPC), which meets eight times a year, or approximately every 6 weeks. The committee looks at several factors when making changes, such as how fast prices are rising, employment and how the UK economy is growing.
Economic growth is becoming a big factor now. The Office for Budget Responsibility (OBR) cut the UK economic growth outlook to 0.7% in 2024 and 1.4% in 2025 (Economic and Fiscal Outlook published on the 22nd of November 2023). The previous forecasts were 1.8% in 2024 and 2.5% in 2025. Usually, interest rates are lowered when economic growth is slow to encourage consumer spending and investment.
It's worth keeping an eye out for bank rate changes and announcements; the next dates for MPC announcements are:
- Thursday, 1 February 2024
- Thursday, 21 March 2024
- Thursday, 9 May 2024
- Thursday, 20 June 2024
- Thursday, 1 August 2024
- Thursday, 19 September 2024
- Thursday, 7 November 2024
- Thursday, 19 December 2024
What does this all mean?
It seems tough times may continue. While some experts and analysts predict rates to drop as early as mid-2024, the BoE has not yet hinted at anything. They will monitor key factors such as inflation and how the economy responds as a whole.
The other thing to remember is that even if there is a significant drop in 2024, it may take some time before many who are locked in with the current rates on borrowing see any benefits.
More on that next.
How do interest rate changes affect my finances?
Base rate changes influence the cost of borrowing generally, not just mortgages. This includes personal loans, car loans and credit cards. It also affects interest rates on savings.
Mortgages
If you're among the 1.4 million households with a tracker or variable rate deal, you'll see changes to your monthly payments as the base rate changes. If you have a fixed-rate deal, you won't see changes until the end of the fixed period. By the end of 2024, it is estimated that around 1.6 million fixed-rate deals are due to end.
While fixed-rate deals are not tied to the BoE base rate, they have an end date. And, as these deals end, borrowers will be moved from the cheaper fixed-rate deals to mortgages with higher rates. As a result, monthly repayments will increase, sometimes significantly, depending on rates offered and the amount owed.
Personal loans and credit cards
Personal loans are virtually all offered at a fixed interest rate, so once you're locked in, base rate changes should not affect your payments. However, interest rates offered for new applications can and are being changed by lenders.
A report by the Moneyfacts Group shows that the average rate offered for personal loans has increased over the last 2 years. For example, a three year loan for £3,000 increased from 14.3% in September 2021 to 17.3% in September 2023. The interest rates over the same period for a £10,000 loan for five years have nearly doubled, from 4.4% to 8.4%.
Interest rates for credit cards have increased, too. According to the same report, the average purchase APR, including credit card fees, rose from 26% in September 2021 to 31.8% APR in September 2023.
Most credit cards' APRs are variable, so providers may adjust these according to the base rate changes. They may also make changes depending on your usage. For example, you don't make your monthly payments on time. However, your card provider should give you at least 60 days to reject the change and pay off what you owe at the current rate. Car loans and car finance deals can also be fixed or variable.
Savings accounts and overdrafts
Bank accounts are also affected by the changes. There have been some good rates offered on savings recently, and as a result of interest rate rises. It's worth spending some time to shop around and compare savings accounts. Be sure to include online bank accounts and challenger banks, too. Some have surprisingly good rates when compared to the bigger UK banks.
There are different types of savings accounts. For example, easy access accounts allow you to access your savings when you like, but with lower interest rates. While notice savings accounts and fixed-rate savings accounts may offer you higher rates, you'll have to wait for a fixed period before you can access your funds.
Many savings accounts offer rates that are not keeping up with inflation. Unfortunately, this means the buying power of the money saved is falling in real terms and may be worth considering switching bank accounts if you're a saver. Here are a few examples of easy access accounts offering 5% or more, which currently beats inflation rates:
Metro Bank | Instant Access Savings (Limited Edition) | 5.22% AER
Ulster Bank | Loyalty Saver | 5.20% AER
Hampshire Trust Bank | Online Easy Access Account | 5.15% AER
Tandem Bank | Instant Access Saver | 5% AER
The average annual interest rate for overdrafts has increased to 22.49% in September, according to the BoE. Interest rates are certainly something to look at when weighing up your borrowing options, but they are not the only thing. For example, if choosing between a loan or overdraft, consider: do you have a large purchase to make, or do you need to fill a small, temporary gap until payday?
In conclusion
It's hard to know what exactly to expect for 2024 regarding interest rates. Some analysts have predicted a rate drop as early as mid-2024. However, that is down to the BoE, which will keep a watchful eye on inflation to get it closer to 2%. Additionally, it will monitor economic growth as this is becoming a big factor.
All this may mean we must wait longer for better financial times. Now may not be the best time to borrow money if you can avoid it or if it can wait. If you're a saver, there are some good deals on the market you may want to look at. In the meantime, for many of us, we will have to continue to watch our spending where possible and plan ahead, especially if we know our disposable income is going to take a hit.
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