When will interest rates fall?

Important information - the value of investments and the income from them, can go down as well as up, so you may get back less than you invest.

UK inflation falls to 3.2% 

The speed with which inflation is falling is crucial to the outlook for interest rates. 

UK inflation fell in March to 3.2%, down from 3.4% in February, according to the Office for National Statistics. 

The largest downward contribution came from food, which is due to some cost pressures in the supply chain beginning to ease. The largest upward contribution came from petrol. 

Economists had expected a fall to 3.1%.

Andrew Oxlade, investment director at Fidelity International, said policymakers will still find it hard to justify cutting rates.

“In January, markets had expected six rate cuts in 2024 and that the first would have happened by now. Predictions today point to only two cuts, from 5.25% to 4.75% with the first not arriving until autumn,” he said. 

The past weekend has also seen growing geopolitical tensions which could have an impact on the outlook for rates.

Attention will now turn to the impact of rising oil prices, driven higher by the crisis in the Middle East. It could further slow reductions in inflation, and further push out hopes of rate cuts even if they are much needed by a weak UK economy.

Ed Monk and Tom Stevenson explored the crisis in the Middle East in the latest Personal Investor podcast.

Current mortgage and savings rates

^{As of 17 April 2024}
Dates and data to watch:   

• Retail sales, March - 19 April 2024
• UK trade, quarterly goods and services, October to December 2023 - 26 April 2024
• Gross domestic product first quarterly estimate - 10 May 2024
• UK labour market May - 14 May 2024

How rising and falling rates affect and mortgages and mortgage pricing?

Standard variable rate (SVR) mortgages and existing trackers tend to follow the Bank Rate, but the pricing of new deals is more complicated.

Banks and building societies lend money from deposits taken from customers but also from money they borrow on money markets.

Fixed mortgage deals are influenced by “swap rates”, be it two-year, three-year or five-year pricing, while variable rate deals, such as trackers are more closely aligned to changes in the yields on gilts, UK government debt bonds.

Since swap rates are based on what the markets think interest rates will be, if they rise, then mortgage lenders will increase their pricing to maintain their profit margin. If they rise too rapidly - mortgage lenders may have to pause lending or withdraw products until pricing stabilises.

When rate market pricing shifts, it steadily filters through to changes in mortgage pricing. A fall in swap rates is often followed by a fall in the rates being offered on new fixed mortgage deals, although this is never guaranteed given the many factors at play.

UK mortgage borrowers’ sensitivity to rates

The UK central bank is particularly mindful of the impact rate changes have on UK consumers.

Some markets, such as the US and Denmark, traditionally have mortgage rate terms of 20 to 30 years. In Britain, Canada and much of Southern Europe, short-term deals pervade.

It means that in the UK, most homeowners are currently on a fixed-rate mortgage, making it the most common type of mortgage.

The Bank of England is acutely aware that millions of people will see these arrangements, some fixed at rates below 1%, coming to an end in the coming years, with those borrowers compelled to take far higher rates.

As of 17 April 2024, the average two-year mortgage is 4.62% and the average five-year mortgage is 4.3%.¹

A peak in savings rates?

Savings rates, of course, are also part of this maelstrom of market pricing. The change in forward market pricing may put pressure on banks to withdraw some of the best buys on offer. Although again, these markets are volatile, and nothing is certain. Given inflation has fallen, saving rates now exceed inflation which currently stands at 3.9%.

As of 12 April 2024, the best return savers can currently get on easy-access cash accounts is 5.02%² although higher rates are available if you tie money up for periods.

The best fixed-term savings account offers 5.17% if you lock in for a one-year fix.

And finally… annuity rates

Aside from increased savings rates, another silver lining of the recent surge in Bank Rate has been improved annuity rates. With annuities, you hand over a lump sum and received an income, often inflation-linked, for the rest of your life. These rates were appallingly low in the era of low rates but have enjoyed a renaissance. Annuity pricing is influenced by the yields on gilts. The 10-year gilt yield hit a high above 4.5% in early September and has since fallen to around 4.27% (17 April 2024). If you sign up to our Pulse alerts, you'll be the first to know when forecasts move.

The Government’s Pension Wise service offers free, impartial guidance to help you understand your options at retirement. You can access the guidance online at www.moneyhelper.org.uk or over the telephone on 0800 138 3944.

Fidelity’s Retirement Service also has a team of specialists who can provide you with free guidance to help you with your decisions. They can also provide advice and help you select products though this will have a charge.

Sources:

¹  The Times, 17 April 2024
² Money Saving Expert, 17 April 2024