Interest rates held again: what might 2024 have in store?

The Bank of England has kept interest rates on hold for the third successive time as the UK base rate closes the year at 5.25%.

The Bank’s Monetary Policy Committee (MPC) voted by a majority of 6-3 to maintain interest rates at their current level, with the three outliers preferring to lift the base rate 0.25 percentage points 5.5%.

While the decision to leave rates at 5.25% was widely expected, the split vote underscores that it’s far too early to rule out further hikes. Some policy makers clearly believe that tighter monetary policy is required.

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Inflation has tamed significantly recently, with the consumer prices index (CPI), the UK’s main measure of price rises, plunging from 6.7% to 4.6% in October.

However, the Bank stated that the MPC will continue to monitor closely the path of inflation, together with the UK’s economic resilience, including the tightness of labour market conditions, wage growth and services price inflation.

“Monetary policy will need to be sufficiently restrictive for sufficiently long to return inflation to the 2% target sustainably in the medium term, in line with the committee’s remit,” the Bank said, issuing a staunch reminder that the UK economy is not out of the woods yet.

Still, as we edge towards 2024, attentions now turn to when interest rates will start to come down. A return to higher rates may still be on the table, but the prospect looks increasingly distant – on both sides of the pond.

In the US, the Federal Reserve (Fed) yesterday held rates in the 5.25-5.50% range - a 22-year high - in response to inflation falling to 3.1% last month.

The Fed’s chair, Jerome Powell, signalled that rate cuts are now zooming into focus. Fed officials predict the benchmark rate could be 0.75 percentage points lower by the end of 2024.

When will rates start to come down?

Interest rate rises have proved a dominant and recurring theme throughout the past two years. Between December 2021 and August 2023, the Bank jacked the base rate up 14 times on the bounce.

Next year, however, the situation is set to reverse – albeit not as aggressively.

Money markets predict the Bank will start cutting rates in the summer, with the base rate expected to fall to 4.25% by the end of the year. Some commentators reckon the first cut could arrive in May, with further rate reductions staggered throughout the second half of 2024.

But the Bank’s future rate decisions will largely hinge on what happens with inflation.

Price rises are expected to continue to ease next year. According to Office for Budget Responsibility (OBR) forecasts, CPI could reach the Bank’s target of 2% by early 2025. But over the past two years inflation has repeatedly defied expectations to remain stubborn, and some experts believe this trend might spill into next year.

That said, inflation is not the only factor that affects interest rate decisions.

Recent economic data, which was bleaker than expected, could accelerate the arrival of rate cuts next year, according to many analysts.

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The UK economy shrank in October, with GDP falling 0.3%, coming in worse than predictions which had forecast a 0.1% contraction. The sharper than expected drop was largely attributed to the manufacturing and construction sectors being hit by poor weather.

The surprise GDP data has heightened the threat of a prolonged economic downturn. In early November, the Bank put the odds of recession at 50/50, as higher interest rates will continue to choke the finances of individuals and businesses.

A further factor that influences rate decisions is wage growth, which has risen sharply this year. After hitting 8.5% during the summer, thanks in part to one-off bonus payments to NHS staff and civil servants, earning increases have since cooled.

Annual private sector regular average weekly earnings (AWE) growth declined to 7.3% in the three months to October – a 0.5 percentage points drop from November’s prediction. That has brought AWE closer to other indicators of pay growth, which have fallen below 7%.

There remain upside risks to the outlook for wage growth, according to the Bank. This includes the potential impact of Jeremy Hunt’s recent decision to hike the national living wage to £11.44 an hour from April.

How has the rate-hike cycle affected savers and borrowers?

Base rate rises have had a marked impact on your savings, investments, and borrowings over the past two years.

Most of you will be familiar with the drill by now: whenever rates go up, mortgages become more expensive, while returns on cash savings improve.

The rate-hiking cycle’s effect on mortgages has been particularly striking. According to data from Moneyfacts, the average two-year fixed rate has risen from 2.34% to 6.04% in the past two years, and the average five-year fixed rate has jumped from 2.64% to 5.65%.

The average standard variable rate (SVR) currently stands at 8.19%, almost double the 4.40% average in December 2021.

Higher rates have hit borrowers hard, especially those coming off previously cheap fixed-rate deals. Many have seen monthly mortgage payments spiral with less favourable deals hitting the market.

According to Karen Noye, mortgage expert at Quilter, the Bank’s decision today to maintain the base rate paints a mixed picture for borrowers.

Noye said: “Borrowers on variable-rate mortgages gain a reprieve from immediate payment increases, which could encourage spending and economic activity. However, those looking to remortgage or secure new mortgages may still face relatively high rates and stringent lending criteria. Lenders however are likely to remain competitive, which could lead to more favourable rates for borrowers over time.”

On a brighter note, mortgage rates have fallen recently, in response to a combination of frozen interest rates and softer inflation. The average two-year fixed mortgage recently fell below 6% for the first time since June 2023, offering some green shoots to borrowers hunting for new deals.

Mortgage rates are expected to continue nudging down in the coming weeks and months and should fall sharply when the Bank finally decides it’s time to cut interest rates.

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Meanwhile, although your borrowings have become more costly over the past two years, the amount you can earn on your savings has risen dramatically.

Moneyfacts data shows that, since the start of December 2021, the average easy access savings rate has risen from 0.20% to 3.18%, while the average easy access ISA rate has leapt from 0.26% to 3.31%.

Notice accounts, which have no fixed term but require you to give notice before drawing your money, have seen even bigger increases. The average rate has risen from 0.54% to 4.44% since December 2021, while the average notice individual savings account (ISA) has seen similar activity, up from 0.37% to 4.25%.

This means that the best-paying savings accounts are now outstripping inflation – great news for savers, although things are moving fast, and rates will drop quickly when interest rates begin to fall.

As always, your chief aim when looking for the best home for your savings and investments is to outpace inflation. If you don’t plan to use the money in the next five years, the stock market, despite exposing you to harsher ups and downs, should give you a better chance of beating price rises.