Interest rates held again: how does the UK compare to other nations?

It’s been a big week for central banks across the globe.

Policymakers in the UK, Japan and the US have met to decide what to do with interest rates in their respective nations.

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Starting on these shores, the Bank of England at noon today announced that interest rates will remain unchanged for the fifth consecutive time. This was widely expected, despite yesterday’s good news that inflation had eased to 3.4% in February - a 2.5-year low.

The Bank’s Monetary Policy Committee (MPC) voted by a majority of 8 to 1 to maintain rates at 5.25%, with one member preferring a 0.25 percentage points reduction to 5%. This offers a strong indication that the Bank is warming to rate cuts.

According to the Bank’s meeting minutes, the eight members who voted to hold want to see “a further accumulation of evidence on inflation persistence” before rate cuts are appropriate.

The dissenter however, felt that waiting for more reassurance before reducing rates would “weigh further on living standards and supply capacity”.

The Bank’s decision mirrored that of the US Federal Reserve (Fed), which yesterday chose to keep rates in a target range of 5.25% to 5.5%. But the US central bank’s chair, Jerome Powell, signalled that looser monetary policy is racing up the agenda. The Fed indicated plans for three cuts this year, broadly in-line with what economists expect to happen in the UK.

In a statement yesterday, the Fed said: “Recent indicators suggest that economic activity has been expanding at a solid pace. Job gains have remained strong, and the unemployment rate has remained low. Inflation has eased over the past year but remains elevated.”

US inflation unexpectedly sped up last month to 3.2%. This means that price rises either side of the Atlantic are now moving at a broadly similar pace. But in the middle of last year that was far from the case. In June 2023, US inflation stood at 3%, while UK CPI was 7.9%.

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Elsewhere, events earlier this week in East Asia really caught the eye.

That’s because the global era of negative interest rates finally ended after the Bank of Japan raised its key rate from -0.1% to 0%, the country’s first hike in 17 years. Importantly, it means that savers will no longer have to pay to deposit money into bank accounts.

Japan’s central bank dropped rates to negative territory in 2016 in a bid to prop up its floundering economy.

So, with a slew of activity from global central banks this week, I thought it would be interesting to examine how these stack up against other economies.

How do UK interest rates and inflation compare to others around the globe?

While UK and US interest rates are at roughly the same level, the global situation paints a strikingly different picture. The table below shows the current and previous interest rates of nations in the G20, a group of 20 countries that meets regularly to discuss global economic and political issues.

Countries have been sorted based on their current interest rates in descending order. I’ve also included current and previous rates of inflation.

Source: Trading Economics

The first thing to note is that the state of affairs in Japan is an isolated case. All other G20 nations have interest rates above zero.

That said, rates are remarkably disparate, ranging from 1.75% all the way up to 80%. A relationship between inflation and interest is evident throughout, as we would expect. There are, of course, some exceptions, such as Brazil and Mexico, whose interest rates far outstrip their respective nation’s price rises.

What also jumps out is that most central banks in the G20 kept interest rates unchanged at their most recent meetings, in-step with both the Bank and the Fed. There were only three exceptions: Argentina, Japan and Singapore.

Interest rate and inflation data for the two countries topping the table, really catch the eye.

Argentina’s central bank cut rates by a fifth at its latest meeting, but they still sit at an eye-watering 80%. The reason for such extreme monetary tightening is to curb three-decade high inflation, which stood at a mammoth 276% in February.

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The situation in Turkey also warrants a mention. Policymakers have jacked up the country’s key interest rate from 8.5% to 45% in just nine months to combat runaway inflation, which has soared to 67%.

And last, inflation in the Euro Area cooled to 2.60% last month, fuelling the prospect of rate cuts. But European Central Bank president Christine Lagarde refused to commit to set path of cuts, saying that "our decisions will have to remain data dependent and meeting-by-meeting, responding to new information as it comes in."

Winners and losers when the Bank finally cuts rates

Rate cuts may still be a few months away, but it’s important to understand what to do once they arrive.

Given that interest rate movements have been such a big influence on our finances over the past few years, most will be familiar with the drill by now: when rates rise, savers win, when they fall, borrowers do.

Uncertainty around when rates will be cut means borrowers on previously cheap fixed-rate deals due to expire soon may face a tricky decision.

Do you temporarily roll on to your lender’s expensive standard variable rate (SVR) in the hope that better mortgage deals are not far down the track? Or immediately lock into a current mortgage product and potentially miss out in a few months’ time when borrowing costs might be more attractive?

Crystal-ball gazing is always a risky endeavour, especially when it comes to making big financial decisions. As many stock market investors frequently find, what’s expected to happen and what does happen is often vastly different.

If you have a fixed-rate deal ending soon, it’s important to take the time to weigh up the risks. Simply put, if you secure a fixed-rate product and interest rates fall shortly after, you might lose out.  The most suitable course of action for you will depend on your affordability and broader financial situation.

If you decide to roll on to the SVR, it’s best to avoid staying there for too long. The average rate is a whopping 8.18%, which means your repayments could take a painful bite out of your monthly pay packet, particularly if your borrowings are sizeable.

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On a brighter note, Moneyfacts data shows that since the start of September 2023, the average two-year fixed rate has fallen from 6.70% to 5.76%, while the average five-year fixed rate has dropped from 6.19% to 5.34%. Although these have risen from 5.56% and 5.18%, respectively, since February.

Savers, meanwhile, have benefited from the combination of rising interest rates and cooling inflation. Moneyfacts data found that some 80% of standard savings accounts now beat inflation.

But savings rates have been falling recently and will likely drop further once the Bank wields the axe to interest rates.

Savers should therefore think carefully when deciding whether to keep their money in an easy access account or lock in to a fixed term, which should come with better rates but restricted access.

Either way, if you plan to use this money to support your long-term financial future, cash savings may not be the most appropriate home. Investing your money in the stock market may come with ups and downs, but over longer periods typically outpaces savings accounts, helping to grow your wealth.