When will interest rates rise (or in fact be cut)? – Latest predictions

10 min Read Published: 16 Nov 2022

bank of england

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: On 3rd November 2022 the Bank of England (BOE) raised the base rate from 2.25% to 3%, the biggest rise in over 30 years.

The Monetary Policy Committee (MPC) was forced to raise interest rates in an attempt to reduce the UK's annual inflation rate, which at the time sat at 10.1%. However, the rate of inflation in the UK has risen further and now sits at 11.1%, the highest level for 41 years. The market is therefore pricing in further interest rate hikes in 2022 and 2023.

The market is predicting that the Bank of England base rate will rise above 4% in early 2023 and as high as 4.8% by July 2023. That would mean that the interest rate on the best 2 year fixed rate mortgage will jump to around 6%.

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 the BOE base rate at 3% and the market now pricing in 2 year fixed mortgage rates to rise to around 6% by the end of 2023, you should seriously consider fixing your mortgage now if you are worried about how high interest rates might go and whether you can keep up your mortgage repayments.

Even if you are currently on a fixed-rate mortgage, where the fixed period isn't due to expire for another 6 months, it is possible to lock in a cheap rate now, which will start when your current fixed deal ends, avoiding any early redemption charges from your existing lender.

Historically the best fixed-rate mortgage deals quickly disappear as soon as there is any sign that the BOE might raise interest rates again, as there is currently.

So if you want to secure the best fixed mortgage deal you need to act fast.

In fact, more than 517 mortgage deals were pulled by lenders in September 2022, after the BOE raised interest rates.

I'd strongly recommend you speak to a mortgage adviser as soon as possible. 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:

  1. Click the link above
  2. Answer the four quick questions about your situation
  3. Enter your email etc
  4. 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.

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How the Bank of England base rate is set

The MPC is the nine-person committee, within the BOE, that determines the BOE base rate. Usually, every six weeks the Bank 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 got 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%.
  • Between December 2021 and November 2022 the BOE has increased it base rate at 8 consecutive meetings, taking the base rate from 0.1% to 3% which is the highest level in 14 years. The BOE is attempting to quell rising inflation which is now well above the BOE's official target of 2%. The market is now pricing in that the BOE base rate will rise to 4.8% by July 2023. 

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 11.1% which is a 41-year high. It means that inflation is now well above the official 2% target rate (having been as low as 0.7% in March 2021) and the cost of living is much higher than this time last year. The BOE had previously suggested the rise in inflation would only be temporary but it now accepts that this is no longer the case, which is why it has raised interest rates eight times between December 2021 and November 2022. It will likely continue to do so in December 2022 and in the first half of 2023.
  • Official support for low rates has evaporated – The MPC meeting minutes from November 2022 showed that the committee vote was split. Seven members voted for a 0.75% interest rate rise while one member voted for a 0.5% rise and one voted for a rise of 0.25%. As it is a majority vote the bank base rate rose from 2.25% to 3%. This is the eighth consecutive meeting that the MPC has increased the base rate, which is unprecedented.
  • The UK economy has surpassed pre-Covid levels but is now heading for a recession – 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. However, the UK economy rebounded by 7.5% in 2021 and eventually surpassed its pre-Covid level. The strength of the UK economy will ultimately impact where interest rates go next. However, in the third quarter of 2022 the UK economy unexpectedly shrank by 0.2%, raising concerns that the cost of living squeeze will finally tip the UK into recession. In fact, the Bank of England believes the UK is already entering a recession. Weak economic growth reduces the chance of another interest rate rise while strong economic growth makes another interest rate rise more likely in order to avoid the economy overheating.
  • Unemployment is rising again – the number of people employed fell by 52,000 in the three months to October. It means that the unemployment rate increased from at 3.4% to 3.6%. Strong employment numbers increase the chances of an interest rate rise as do rising wages, while weak employment numbers make interest rate rises less likely.
  • UK economic growth forecasts predict a long recession – In August 2022  the Bank of England cut its GDP forecasts for 2022 from 3.75% (which it published in May) to 3.5% and stated that the UK economy will contract by 1.25% in 2023 and 0.25% in 2024. But in November it slashed these projections further, predicting that the UK is entering a recession that will last for 2 years. In addition, the International Monetary Fund and the OECD also recently cut their UK GDP forecasts.

 

What to do next

The ability to remortgage and/or fix your mortgage has become more difficult over recent years as the rules surrounding the affordability tests when applying for a mortgage were tightened leaving some borrowers stranded on their existing deals. It's important to calculate the impact of an interest rate rise and seek advice from a mortgage expert ahead of time by following the steps below.

Whether you are on a tracker mortgage, variable rate mortgage or looking to remortgage your existing fixed rate deal that is coming to an end the steps below will take you a few seconds, but could prevent your mortgage repayments crippling your finances in the future and help you secure a low rate while they are still available.

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 see how your monthly mortgage payments could change based on different interest rate rises.

So let's say you had borrowed £200,000 for 30 years at a variable rate of interest. In the calculator you would enter the original loan amount (£200,000 on a repayment basis), the original term (30 years) and the current rate of interest you are paying (let's assume 2.5%). The Bank of England base rate is currently 3%. So let's say you want to see the impact if the base rate increased by 2% (to 5% – which is the historic long-term average) you just enter 2% into the ‘anticipated rate change' box and click calculate.

The result shown below the interest rate rise calculator tells you that your current mortgage repayment would increase from £790 a month to £1,013 a month. That's an extra £223 a month that you'd need to find.

However, if you have a fixed rate mortgage deal then your monthly repayments won't increase if the Bank of England base rate rises, but you may be wondering how much higher your repayments will be when you come to remortgage. So let us assume the same numbers used above with a fixed rate mortgage at 2.5% that is due to come to an end.

Then you would enter the terms of your original mortgage deal as before but would instead base the ‘anticipated rate change' figure on the difference between the Bank of England base rate at the time you took out your fixed rate mortgage (i.e. 0.1%) and where it is projected to be in the future when you come to remortgage.

So assuming the BOE base rate will hit 4.8% in 2023 you would set the ‘anticipated rate of change' to 4.7% (i.e. 4.8% – 0.1%). This would mean that once your fixed rate mortgage comes to an end and you remortgage, your monthly payments would increase from £790 a month to £1,358 a month. That's an extra £567 a month that you'd need to find.

Of course this is only a guide as to what your new mortgage repayments might be as it doesn't take into account the reduction in the size of your mortgage as a result of your previous monthly repayments.

Once you have the result move on to step 2 below.

Interest rate calculator

Quickly find out how much your mortgage payments will increase or decrease by when interest rates change

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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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