The Bank of England has held UK interest rates at 5%, signalling that the country is “gradually on the path down” from the higher borrowing costs seen in recent months. Governor Andrew Bailey confirmed the Bank’s decision not to raise rates further, noting that inflation has “come down a long way.” However, he emphasised that more evidence is needed to ensure inflation remains low before making further reductions.
Despite the decision to hold rates, inflation is still slightly above the Bank’s target, with the latest figures showing a rate of 2.2% last month. This was an improvement from previous months, but Bailey highlighted that it is “vital” for inflation to remain controlled, warning that cuts should not be implemented too quickly or by too large a margin.
Experts are forecasting that the Bank may cut interest rates again as early as November. With two more rate-setting decisions to come before the end of 2024, borrowers and savers are watching closely for signs of how these will affect the UK economy.
Impact on Borrowers and Savers
The Bank of England’s base interest rate directly influences the rates offered by high street banks and other lenders. As a result, higher interest rates have meant that people are paying more for mortgages, credit cards, and other forms of borrowing. However, savers have benefited from better returns on their savings accounts due to the higher rate environment.
For many, particularly homeowners with variable-rate mortgages or those looking to remortgage, the interest rate freeze will not offer immediate relief. Mortgage rates have surged over the past year, driven by global economic shocks such as the COVID pandemic and the war in Ukraine. Higher mortgage costs have also led to landlords raising rents, putting further pressure on renters across the UK.
Rising Rent and Economic Struggles
Sofia and James, a couple from Berkshire, are among those impacted by rising rents. After their rent increased by £100 to £1,650 per month in May 2024, they were forced to move to a smaller terraced house, where they now pay £1,400. Despite a combined income of £54,000, the couple have struggled to save for a deposit on a house. Sofia shared how she had to cut her maternity leave short due to financial constraints, relying on food banks and even facing difficulty affording fuel for their car.
The Bank of England acknowledged the ongoing challenges facing households but reiterated that the decision to hold interest rates was part of a strategy to tackle “persistent inflationary pressures” in the UK economy. It expects inflation to rise to around 2.5% by the end of the year, but there are signs of improvement in other areas, with mortgage approvals hitting their highest level since September 2022.
A Glimmer of Hope for the Economy
While global shocks like the pandemic and the Ukraine war have significantly impacted consumer prices, Bailey noted that these “inflation shocks” have now “passed through” the economy. Despite this, inflation remains above the Bank’s 2% target, and the UK’s economic recovery has been slow.
The Bank also highlighted “improved real incomes” and signs of increased economic growth, although it warned that the pace of growth may remain sluggish. It expects GDP growth of just 0.3% between July and September, slightly lower than the previous 0.4% forecast.
UK Interest Rates – Looking Ahead
Looking ahead, the new Labour government has promised to address the UK’s lacklustre economic growth, which has been an ongoing issue in recent years. With the Bank of England’s cautious optimism, there is hope that as inflation continues to fall, interest rates will follow suit, offering relief to borrowers while maintaining stability for savers.
