When will interest rates come down?
Between December 2021 and August 2023, the Bank of England raised interest times 14 times in an attempt to tackle soaring inflation.
Since then, members of the Bank’s Monetary Policy Committee (MPC) have opted to keep interest rates on hold at 5.25% for the fifth consecutive time.
This has now changed conversations from how high they will go, to how soon they will come down, especially as they now sit at a 16-year high.
Governor of the Bank of England, Andrew Bailey, has addressed this and said that rate cuts may be on their way before inflation reaches the Bank’s 2% target.
Andrew stated “We don’t have to actually get inflation all the way back to target… to cut rates for instance. What we have to do is be convinced that it is going there.
“We should act ahead of time in that sense because we have to be forward looking.”
Despite this, he never confirmed on whether or not interest rates will come down or how much of a decrease this would be.
He added “We do need to see further progress.
“But I do want to give this message very strongly. We have had very encouraging and good news, so I think you know we can say – we are on the way.”
What do analysts think?
Those analysing the market seem to agree that we’ll see these cuts by the end of the year, but there is no general consensus on exactly when this will be. Here are a few of their thoughts:
Ruth Gregory, Deputy Chief UK economist at Capital Economics
Ruth feels that inflation will fall “further and faster” than is to be expected over the next few months. She said, “That’s why we think a rate cut in June is possible and why we think rates will fall to three per cent in 2025 rather than to 3.75 to four per cent as priced into the market.”
Marion Amiot, senior Europe economist at S&P Global Rating
Marion thinks the first rate cut could be in August.
“The Bank of England will need to see a lot more moderation in wages and services prices before it starts cutting rates,”.
Gabriella Dickens, G7 economist at AXA Investment Managers
Gabriella sits somewhere in between Ruth and Marion: “A decision of when to ease will be finely balanced between June and August.
“But on balance, we now see the first move as more likely in June. We continue to expect two further 25 basis point cuts in November and December.”
Colin Asher, Senior Economist at Mizuho Bank
Thinks a cut in May “seems off the table”, stating that while June is possible, August is still the “most likely” date.
Meanwhile, the Bank of England’s wider strategy has been criticised by Carsten Jung, Senior Economist at the IPPR, who said the MPC has “tightened the screws too much, which is squeezing much-needed future growth”.
“Inflation is coming down more quickly than many predicted just a few months ago,” he said. “This is largely due to global supply chains recovering and energy costs falling. But also, domestic price pressures are falling quicker than the Bank had anticipated.
“The Bank should therefore cut rates more quickly than its current plans.”
Suren Thiru, economics director at ICAEW
Feels the cycle of hiking interest rates is “firmly in the rear-view mirror, the long delay between tightening policy and its impact on the wider economy means that the heavy toll of 14 rate rises has yet to fully crystalise”.
“The Bank of England remains overly cautious on the prospect of rate cuts given the startling inflation slowdown and an economy in recession, increasing the risk they prolong our economic struggles by keeping policy too tight for too long,” he commented.
As you can see, there is a lot of uncertainty around this topic, so it’s important to keep an eye on your savings and the interest rate you are receiving.
Keeping on top of all the rates and changes can be overwhelming, which is why we’re here to check our clients’ savings rates as part of our regular review process. If you need any assistance, please don’t hesitate to get in touch.
