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

10 min Read Published: 11 May 2023

bank of england

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When will interest rates go up (or down)?

In summary: On 11th May 2023 the Bank of England (BOE) raised the base rate from 4.25% to 4.5%, its highest level in over 14 years.

The BOE raised interest rates in an attempt to reduce the UK's annual inflation rate, which now sits at 10.1%, well above the target rate of 2%.

The market is pricing in further interest rate hikes in 2023, predicting that the Bank of England base rate will rise to almost 5% by August 2023 before slowly falling over the next five years to end up around 3.4%. Worryingly, this predicted peak in the BOE base rate is higher than was predicted just a few weeks ago as concerns grow that the BOE might have to raise the base rate more aggressively than previously thought to combat inflation, which fell less than expected in March and remains above 10%.

Currently the average interest rate on a 2 year fixed-rate mortgage is 5.34%, assuming a 75% loan-to-value, but if the BOE increases its base rate faster than expected mortgage rates will rise further.

The Bank of England will next meet on 22nd June 2023 to decide what level interest rates should be set at. Below I explain what you should be doing now before going on to explain what will ultimately determine when interest rates will go up or down.

Should you fix your mortgage rate now?

With the BOE base rate at 4.5% and the market pricing in further increases you should consider fixing your mortgage if you are worried about how high interest rates might go and whether you can keep up your mortgage repayments. While the average 2 year fixed mortgage rate is around 5.34%, the best rate, assuming a 60% loan to value, is much lower at 4.27%.

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.

I'd strongly recommend you speak to a mortgage adviser as soon as possible, who can look at all your options, including variable rate and tracker mortgages. If you don't know a mortgage adviser whose opinion you trust, then follow these simple steps to get a free mortgage review* 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 Monetary Policy Committee (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 May 2023 the BOE has increased its base rate at 12 consecutive meetings, taking the base rate from 0.1% to 4.5% which is the highest level in over 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 almost 5% by August 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.

  • Inflation is well above the official target – UK inflation now sits at 10.1% after falling less than expected in March 2023. It means that inflation is still well above the official 2% target rate (having been as high as 11.1% in October 2022) and the cost of living is much higher than a year previous. The BOE had previously suggested that 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 twelve times between December 2021 and May 2023. It will likely continue to do so in 2023 if inflation proves persistent.
  • Official support for low rates has evaporated – The MPC meeting minutes from May 2023 showed that the committee vote was split. Seven members voted for a 0.25% interest rate rise while two voted to keep the base rate at 4.25%. As it is a majority vote the bank base rate rose from 4.25% to 4.5%. This is the twelfth consecutive meeting that the MPC has increased the base rate, which is unprecedented.
  • The UK economy is teetering on the edge of recession – The coronavirus outbreak sent the UK economy into its first recession since 2009, when it contracted by 9.9% in 2020. This was the biggest annual decline on record. However, the UK economy rebounded by 7.5% in 2021 and 4% in 2022, surpassing 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% and then produced zero growth during the final quarter of 2022. While this means the UK avoided the accepted definition of a recession, which is when the economy shrinks for two consecutive quarters, it is teetering on the edge of 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 – the number of people employed rose by 169,000 in the three months to February. But the unemployment rate rose to an eight-month high of 3.8%. Strong employment numbers increase the chances of an interest rate rise as do rising wages (which we are seeing), while weak employment numbers make interest rate rises less likely.
  • UK economic growth forecasts no longer predict a UK recession – In November 2022 the Bank of England slashed its economic projections, predicting that the UK would enter a recession that would last for 2 years. At the time the International Monetary Fund and the OECD also cut their UK GDP forecasts. However, after March's policy meeting the Bank of England stated that the UK will now not enter a recession during 2023, a prediction that was also backed by the Office for Budget Responsibility.

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 4%). The Bank of England base rate is currently 4.5%. So let's say you want to see the impact if the base rate increased by 0.5% (to 5% – which is the historic long-term average) you just enter 0.5% 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 £955 a month to £1,013 a month. That's an extra £58 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 but 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 5% in 2023 you would set the ‘anticipated rate of change' to 4.9% (i.e. 5% – 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 £1,385 a month. That's an extra £595 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

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Step 2 – The best way to find out your mortgage options

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 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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