Interest rates influence the mortgage, credit card, and savings rates for millions of people throughout the UK.

In June, the Bank of England maintained rates at 5.25% for the seventh consecutive time, even though inflation had dropped to its 2% target. Some economists had anticipated a rate reduction in August, but recent inflation data suggests the Bank may delay a cut until autumn.

An interest rate indicates the cost of borrowing money or the return on saving it. The Bank of England’s base rate is the rate it charges other lenders to borrow money.

This impacts the rates that other banks charge their customers for loans, such as mortgages, and the interest they pay on savings. The Bank of England adjusts rates to control UK inflation, which is the increase in prices over time. When inflation is high, the Bank may raise rates to keep it at or near the 2% target, encouraging people to spend less and thus reduce demand. Once inflation begins to decrease, the Bank may hold or lower rates.

The current Bank rate of 5.25% is the highest in 16 years. However, it was significantly higher for much of the 1980s and 1990s, peaking at 17% in November 1979. Questions have arisen about why interest rates haven’t been cut, given that inflation is now well below its peak of 11.1% in October 2022. The main inflation measure, CPI, reached 2% in May and remained unchanged in June, the lowest rate in nearly three years.

When inflation hit the 2% target in May, some economists predicted that the Bank would cut rates at its August meeting. However, the Bank also considers other measures of inflation when deciding on rate changes, and some of these remain higher than desired. Recent figures indicate that parts of the economy, like the services sector—which includes everything from restaurants to hairdressers—are still experiencing significant price increases. This might lead the Bank to hold rates in August and consider a cut at its next meeting in September. The Bank must balance the need to slow price rises against the risk of harming the economy and avoid cutting rates only to have to raise them again soon after.

Although UK inflation has reached the Bank’s 2% target, it is expected to rise slightly over the year before settling down in early 2025, making it challenging to predict exactly how interest rates will move. In May, the International Monetary Fund (IMF) recommended lowering UK interest rates to 3.5% by the end of 2025. The IMF, which advises its members on economic improvements, acknowledged the need for the Bank to carefully manage rate cuts to avoid acting too quickly before inflation is fully controlled. However, in its latest forecast, the IMF cautioned that persistent inflation in countries such as the UK and US might necessitate keeping interest rates “higher for even longer.”

According to the government’s English Housing Survey, just under a third of households have a mortgage. When interest rates change, approximately 1.2 million people with tracker and standard variable rate (SVR) mortgages usually see an immediate adjustment in their payments. However, more than 80% of mortgage customers have fixed-rate deals, so their current monthly payments remain unaffected, though future deals will be influenced by rate changes. Mortgage rates are significantly higher than they have been for most of the past decade, with the average two-year fixed rate now just under 6%, according to Moneyfacts. This means homebuyers and those refinancing their mortgages are facing much higher costs compared to a few years ago.According to UK Finance, approximately 1.6 million deals are set to expire in 2024.

Bank of England interest rates also affect the cost of credit cards, bank loans, and car loans. Lenders may increase their rates if they anticipate higher interest rates from the Bank of England. Conversely, if rates decrease, interest payments could become cheaper.

The Bank of England interest rate also impacts the returns savers can earn on their money. Individual banks and building societies have been pressured to pass higher interest rates on to their customers. The UK’s financial watchdog has warned that banks will face “robust action” if they offer unjustifiably low savings rates.

In recent years, the UK has had one of the highest interest rates among the G7 nations, which represent the world’s seven largest advanced economies. In June, the European Central Bank (ECB) reduced its main interest rate from a record high of 4% to 3.75%, marking the first decrease in five years. Meanwhile, the US central bank chose to keep its key interest rates between 5.25% and 5.5%, unchanged since July 2023. Although it had previously indicated the possibility of three rate cuts in 2024, it now anticipates only one.