The Bank of England unveiled its biggest interest rate hike in more than 30 years this week as it rose from 2.25% to 3%, a jump of 0.75%.
That makes the base rate the highest since 2008 – while the rate hike is the biggest increase since 1989.
Chancellor Jeremy Hunt said of the rise: “Interest rates are rising around the world as countries manage rising prices largely due to the Covid-19 pandemic and the invasion of ( Vladimir) Putin in Ukraine.
“The most important thing the UK government can do at this time is to restore stability, put our public finances in order and bring the debt down so that interest rate hikes are kept as low as possible.”
The hike could cause other problems for owners, who could end up paying hundreds of extra pounds on their annual mortgage – at a time when the country is already facing soaring prices in the context of a cost of living crisis.
While many are wondering when things might get better, when might interest rates start to come down?
Here’s what you need to know…
When could interest rates drop?
There is no clear answer to this question, as no one really knows at this point when interest rates will start to fall.
The Bank of England’s inflation forecast over the next few months indicates that rates could continue to rise next year before starting to fall again in 2024.
This would be in line with the projected path of inflation rates, which are expected to reach around 11% before starting to decline in 2023 and 2024.
The UK is also expected to be in recession for much of that time, with estimates that it could be the longest the country has ever seen – with the Bank of England suggesting it could even last until 2024.
Interest rates are expected to rise again before the end of the year and are expected to reach around 5.25% – but this is lower than the 6% originally forecast following the Kwasi Kwarteng mini-budget, which has since been canceled .
Joshua Raymond, Director of Online Investment Platform XTB.comtold metro.co.uk: “The UK central bank now believes that interest rates do not need to rise as high as existing market expectations to bring inflation under control and the UK economy is in start of a long and deep recession that could last until 2024.
Indeed, the UK’s central bank predicts that the long recession will help bring prices under control, and it does not need to raise rates aggressively as this could deepen the recession and be useless in controlling the economy. inflation which she says will fall regardless of the rise. rates.
This has forced investors to change their rate expectations for 2023. Prior to this week’s meeting, the market was expecting interest rates to peak at around 5.25% next year.
“Rhetoric from the Bank of England has probably lowered that forecast to closer to 4.5% to 4.75% and we could see two to three more rate hikes of around 0.5% before rates hit. stabilize.
Of course, there’s also every chance that interest rates will come back down “rapidly to stimulate economic activity and try to ease the contraction in economic activity in the UK”.
“However, the BoE is unlikely to have much leeway to do so through 2024, given that it expects inflation to remain at around 10% for the first half of 2023 before rising. fall to 5% at the end of the year.”
Why have interest rates increased?
Their website states, “The cost of living has risen sharply over the past year. The speed of this increase is called the rate of inflation.
“It is our job to keep the UK inflation rate low. We have a target of 2%.
Inflation rates are currently higher than those due to the price of goods from abroad and the increase in the cost of energy.
The BoE also attributes this to the fact that there are more vacancies than there are people to fill them, which means employers have to offer higher wages to attract candidates.
“Inflation is likely to continue to rise this year and start to fall next year. We expect it to be close to our 2% target in about two years.
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