This article is continually updated to bring you the latest analysis on when interest rates are likely to rise or be cut. Sign-up to our newsletter to receive updates to your inbox.
When will interest rates go up?
In summary: The Bank of England (BOE) base rate currently sits at a historic low of 0.1% after two emergency interest rate cuts in 2020, aimed at reducing the economic impact of the coronavirus outbreak.
But with inflation now at 4.2%, stubbornly above the official target of 2%, traders are betting that the Bank of England will raise its base rate to 0.25% at its meeting on 16th December 2021.
With some economists predicting that inflation will hit 6% by April 2022, the market is also pricing in 2 more rate hikes next year, taking the base rate over 1% by the end of 2022.
Below I explain what you should be doing now before going on to explain what will ultimately determine when interest rates will go up.
Should you fix your mortgage rate now?
With interest rates at historic lows and the market now pricing in an imminent interest rate rise, you should seriously consider fixing your mortgage now. Historically the best fixed-rate mortgage deals quickly disappear as soon as there is any sign that the BOE might raise interest rates, as there is currently.
If you want to secure the best fixed mortgage deal you need to act fast. The simplest route, which I'd strongly recommend, is to speak to a mortgage adviser. If you don't know a mortgage adviser whose opinion you trust, then follow these simple steps to get a free mortgage review in 30 seconds* from a vetted FCA regulated mortgage professional:
- Click the link above
- Answer the four quick questions about your situation
- Enter your email etc
- Then select the “Review my Mortgage” button
It's as easy as that. Then an expert mortgage adviser will check if you are eligible to remortgage for free and with no obligation. They will also tell you precisely how much you could save. Typically the free remortgage check saves people around £80 per month per £100,000 of mortgage.
A simple and easy way to see whether you can get a better mortgage rate and save thousands.Get a free mortgage review*
How the Bank of England base rate is set
The Monetary Policy Committee (the MPC) is the nine-person committee, within the BOE, that determines the BOE base rate. Usually, on the first or second Thursday of most months, the Bank of England announces the MPC's interest rate decision. You can find a full schedule of decision dates on the Bank of England website. Whenever a decision is announced the MPC meeting minutes are also published. These minutes are scrutinised by investors for any hints of when rates might go up or down in the future. For example, they would see how many of the nine-person committee voted for interest rates to go up, down or stay the same.
The forecasting of the Bank of England base rate has been transformed in recent years. The former Governor of the Bank of England (BOE), Mark Carney, originally created a notional link between the UK unemployment rate and the BOE base rate before replacing this with 18 economic indicators which still inform the BOE's interest rate decision making today, under current Governor, Andrew Bailey.
When does the market think mortgage rates will next rise or be cut?
The Bank of England has moved the goalposts numerous times, in recent years, on when interest rates will likely go up. Of course, when interest rates rise or fall mortgage rates will follow suit. Below is a short potted history to highlight how we have go to where we are today:
- Interest rates were slashed after the financial crisis in 2007/2008, from over 5% down to 0.5%, in order to support the UK economy.
- After much speculation that interest rates would finally go back up in 2015 this didn't happen because inflation suddenly turned negative. For an economy to attain a healthy level of growth the BOE aims for an official inflation target of 2%. Raising rates tends to send inflation lower, therefore the BOE left interest rates unchanged.
- The Brexit vote was a huge game-changer. The previous talk was all about when interest rates would go up. Suddenly the talk became concerned with the chance of an economic slump because the UK had decided to leave the European Union. The Bank of England was so concerned that it decided to cut interest rates from 0.5% to 0.25% in August 2016 and launch a new bout of Quantitative Easing (QE) to try and stimulate economic growth.
- Yet the UK economy proved surprisingly resilient after the EU referendum. It led some people, even the then Prime Minister Theresa May, to suggest that the BOE overreacted when it cut interest rates.
- The Bank of England finally raised interest rates in November 2017 for the first time in over a decade, back to 0.5%.
- Then in August 2018 the Bank of England raised the bank base rate from 0.5% to 0.75% as the economic outlook improved. This was the highest level in almost a decade.
- However, the arrival of the COVID-19 pandemic changed everything and the BOE carried out two emergency interest rate cuts in March 2020, first from 0.75% to 0.25% and then from 0.25% to 0.1%.
- Now in 2021 there is growing concern that interest rates might have to rise before the end of the year to quell rising inflation which is now above the BOE's official target of 2%. As recently as the summer the market had been pricing in a BOE interest rate rise at the end of 2022 at the earliest but this has now changed. The market is now pricing that the BOE base rate could rise to 0.25% by December 2021.
The indicators to watch that will determine when interest rates go up or down
The BOE uses a number of economic indicators when deciding whether rates will rise or be cut. So understanding the key economic indicators is important when judging when interest and mortgage rates are likely to rise or be cut. Below is a roundup of the most important indicators to keep an eye on. Of course in the short term the impact of the coronavirus on the UK economy is likely to have the largest influence over where interest rates go next.
- Inflation is well above the official target and still rising – UK inflation now sits at 4.2% which is the highest level in a decade. It means that inflation is now well above the official 2% target rate (having been as low as 0.7% in March) and the cost of living is higher than this time last year. The BOE had previously suggested the rise in inflation would only be temporary but after its last policy meeting it signalled that it will need to raise interest rates in the coming months to dampen inflation.
- Official support for low rates is evaporating – As recently as September 2021 the MPC meeting minutes showed that the committee voted unanimously to keep interest rates at 0.1%. But at its most recent meeting the committee was split 7-2 in favour of keeping interest rates unchanged, making a future rate hike more likely. Senior members of the MPC have even stated that inflation is now proving stubborn, which increases the chance that members will vote for an interest rate rise before the end of 2021.
- The UK economic recovery is faltering – The coronavirus outbreak sent the UK economy into its first recession since 2009. It meant that the UK economy contracted by 9.9% in 2020, which was the biggest annual decline on record. With the UK starting 2021 in another national lockdown there was concern that the UK could experience its second recession in a year after the economy contracted by 1.5% in the first quarter of 2021. However, the UK economy rebounded by 5.5% between April and June 2021, which meant economists forecast that UK GDP would hit its pre-pandemic level by the end of the year. However, UK GDP disappointed in the third quarter, falling from 5.5% to 1.3%, slightly weaker than expected. The strength of the economic rebound will ultimately impact where interest rates go next. Weak economic growth reduces the chance of an interest rate rise while strong economic growth makes an interest rate rise more likely in order to avoid the economy overheating.
- Unemployment is falling – the number of people employed grew by 160,000 in October 2021 despite the ending of the furlough scheme. This means that the UK unemployment rate fell to 4.3%, the lowest level since July 2020 but still above the pre-pandemic level. Strong employment numbers increase the chances of an interest rate rise and right now wages are starting to increase and there is a record number of job vacancies.
- UK economic growth forecasts are being tempered – The Bank of England had warned that the UK would take time to recover from its recession in 2020. However, throughout 2021 it continued to increase its forecasts for UK economic growth in 2021. In the summer the BOE predicted that UK GDP would grow by 7.25% in 2021. That would have made it the highest growth rate in 70 years. The BOE also stated 2022 GDP would hit 6%. Strong economic growth prospects increase the chances of an interest rate rise. However, in the last month the BOE has cut its GDP forecasts for 2021 and 2022 to 7% and 5% respectively. In addition, the International Monetary Fund also cut its 2021 UK GDP forecast to 6.8%.
The rules that could stop you remortgaging
The ability to remortgage and/or fix your mortgage has become a bit more difficult over recent years as the rules surrounding the affordability tests when applying for a mortgage were tightened slightly. Lenders always had to make sure borrowers could still afford to pay the mortgage if interest rates went up.
However, if you were simply remortgaging, lenders didn't have to apply the more stringent affordability tests. Some lenders did just that which made remortgaging a bit easier. But new rules removed this option for lenders which could end up leaving some borrowers stranded on their existing deals which is why it's important to calculate the impact of an interest rate rise and seek advice from a mortgage expert by following the steps below. It will take you a few seconds but could prevent your mortgage repayments crippling your finances in the future and help you lock into low rates while they are still available.
If you are planning on fixing your mortgage rate when interest rates do start going up, mortgage rules may prevent you – leaving you stranded on your existing deal with your mortgage repayments rising in line with the bank base rate or your lender's whim.
Step 1 – Calculate the impact on your monthly mortgage payments
Quickly calculate the impact of an interest rate rise on your mortgage payments with this interest rate rise calculator. Just enter the original details of your mortgage, such as the original amount borrowed and the original term to be able to see how your monthly mortgage payments could change based on different interest rate rises.
So let's say for example that back in 2007 I borrowed £200,000 for 30 years at a rate of 5%, which has since dropped to 2.5% (the lender's standard variable rate). In the calculator I would enter the original loan amount (£200,000 on a repayment basis), the original term (30 years) and the current rate of interest (2.5%). The Bank of England base rate is currently 0.1%. So let's say I want to see the impact if the base rate increased by 4.9% (to 5% – which is the historic long-term average) I just enter 4.9% into the ‘anticipated rate change' box and click calculate.
The result shown below the interest rate rise calculator tells you that my current mortgage repayment would increase from £790 a month to £1,385 a month. That's an extra £844 a month that I'd need to find!
Once you have the result move on to step 2 below.
Quickly find out how much your mortgage payments will increase or decrease by when interest rates changeUse the free calculator
Step 2 – The best way to find out your mortgage options
Consumers are unaware of the new rules and the fact they could leave some people stranded on their current deals. At best their mortgage repayments will increase in line with the Bank of England base rate, at worst at the whim of their lender.
Most consumers will wrongly assume that using a price comparison site is the best thing to do when looking to remortgage. However, bear in mind
- many mortgage deals are only available via mortgage advisers so don't appear on price comparison sites
- not everyone can get the rates quoted on price comparison sites
- price comparison sites don't take into account your credit rating or personal circumstances which will determine whether a lender will actually lend to you. For example you may not be eligible for the deals quoted by comparison sites and won't find out until they credit check you. That in itself will then hinder future mortgage applications
That is why you are almost always better off dealing with an independent mortgage adviser rather than going it alone. This is why 70% of borrowers now use a mortgage adviser to find the best deal from a lender who will actually lend to them. Therefore, we recommend getting in contact with a mortgage advisor yourself. You can arrange a free remortgage review in just 30 seconds using this online tool*.
If you already have an independent mortgage broker that you trust then I suggest you get in touch with them as there has never been a better time to remortgage.
Further reading – should you fix your mortgage rate now
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