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.

This guide to interest rates is updated each week or as markets move. If you sign up to our Pulse alerts, you'll be the first to know when forecasts move.

The Bank of England has held interest rates for the seventh time in a row, with the central bank’s Monetary Policy Committee (MPC) voting by a majority of 7-2 to maintain rates at 5.25% (20 June). Two members preferred to reduce the Bank Rate by 0.25 percentage points, to 5%.

Andrew Bailey, the Bank’s governor, said, “It’s good news that inflation has returned to our 2% target. We need to be sure that inflation will stay low and that’s why we’ve decided to hold rates at 5.25% for now.”

According to the MPC, indicators of short-term inflation have continued to moderate, particularly for households but Consumer Price Index (CPI) which measures the overall change in the prices of goods and services that people typically buy over time, is expected to rise in the second half of the year.

UK gross domestic product (GDP) appears to have grown more strongly during the first half of the year. There’s some uncertainty around the evolution of labour market activity but the MPC notes that though it continues to loosen, it remains relatively tight by historical standards.

The next central bank meeting is scheduled for 1 August. The meeting will be held a month after the general election, which is set to be held on 4 July.

Fidelity's view

Ed Monk, associate director at Fidelity International, said "The ongoing general election campaign had already handed the Bank of England a reason not to move on rates this month but even without that, a cut was unlikely. Once again just two MPC members voted to cut."

He added that the pain for borrowers will continue to go on.

"With inflation back to 2% there will be increasing pressure on the Bank of England to justify the continuation of high rates. For savers, now represents a rare opportunity to achieve returns on their money which beat inflation by a clear margin. It should be remembered also that risk-assets such as shares can also benefit during such periods and have a history of generating inflation-beating returns that outpace cash," said Ed.

UK inflation finally meets the 2% target

Inflation in the UK has met the central bank's 2% target for the first time in three years.

The fall will be welcomed by the central bank and households, particularly those with mortgages worried about the future direction of interest rates. It's also welcome news for Prime Minister Rishi Sunak, ahead of the general election. 

According to the Office for National Statistics, the fall in inflation was driven by food and non-alcoholic beverages, recreation and furniture prices.

Tom Stevenson, investment director at Fidelity International, said: "The return of inflation to the Bank of England’s 2% target is not the end of the cost-of-living crisis but it may mean we are through the worst."

"The drop in the headline rate of inflation to 2% is welcome news for the Prime Minister, Rishi Sunak, just a couple of weeks before the general election. It will be highlighted by the government as evidence that the economy has stabilised, despite growth stagnating in April."

"This is the first month in nearly three years that inflation has been at or below the official target, having peaked at a 40-year high of 11.1% in October 2022. The main driver was food prices, which fell in the month, offset by rising fuel costs."

Will the Bank of England cut rates soon?

Tom said it is less likely that the central bank will view the reading as a prompt to cut interest rates from their 16-year high of 5.25%.

"Under the surface, the rate of services inflation, at 5.7%, remains a concern. Core inflation (excluding energy, food, alcohol and tobacco) eased to 3.5% from 3.9% but also remains well ahead of the Bank’s target," said Tom.

He mentioned that the central bank is focused on wages, which continue to grow faster than the headline rate of inflation. 

"Another split decision is likely, with a majority expected to vote to hold the bank rate steady for another month. Although the Bank is independent of the government, a rate cut so close to the election would be controversial."

"Having paused speeches and other communications during the election campaign, the monetary policy committee would not be able to explain why they had cut rates at this week’s meeting."

According to the Financial Times, investors lowered their bets on the first quarter-point rate cut being delivered by the central bank's August meeting to one in three, from a 45% chance immediately ahead of the inflation data being published.1

The FT report that traders now place a probability of 75% that a second 0.25 percentage point rate cut will be delivered this year. That's down from 95% when markets closed on Tuesday. 

ECB cuts interest rates for the first time in 5 years

The European Central Bank (ECB) cut interest rates to 3.75%. According to Christine Lagarde, president of the ECB, the outlook for inflation had improved “markedly” (6 June).

The cut in rates was also attributed to the dynamics of underlying inflation and the strength of monetary policy transmission, according to the Bank.

Despite this progress, the ECB said, “domestic price pressures remain strong as wage growth is elevated, and inflation is likely to stay above target well into next year.”

Headline inflation is expected to average 2.5% in 2024, 2.2% in 2025 and 1.9% in 2026.

The Eurozone is not the first major global economy to cut rates. On  5 June, the Bank of Canada also cut rates.

Current mortgage and savings rates

2-year fixed mortgage 

5-year fixed mortgage 

Easy-access cash account 

6-month fixed term savings account 

1-year fixed term savings account 

4.82%

4.41% 

5.1% 

5.22% 

5.21% 

Mortgage rates are based on best rate for remortgage borrowers, as of 20 June 2024.

Dates and data to watch:   

  • UK trade, May - 11 July 2024
  • Gross domestic product (GDP) estimate - 11 July 2024 
  • Consumer price inflation - 17 July 2024
  • UK labour market - 18 July 2024
  • Retail sales, June - 19 July 2024

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.

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 20 June, the average two-year mortgage remains at 4.82%. The average five-year mortgage has seen a rise from 4.32% on 23 May. It currently sits at 4.41%.


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 2%

As of 20 June 2024, the best return savers can currently get on easy-access cash accounts is 5.1%3 although higher rates are available if you tie money up for periods.

The best fixed-term savings account offers 5.21% if you lock in for a one-year fix.

Fidelity: current interest rates we pay on cash

Here are the current interest rates we pay on cash held in our accounts. This includes our -

Please note that interest rates can be changed at any time and the rates above have been applied since 1 April 2024.

Account

Gross rate of annual interest

Annual Equivalent Rate (AER)

ISA (including Junior ISA)

3.60%

3.66%

Investment Account

3.60%

3.66%

Cash Management Account

3.60%

3.66%

SIPP (including Junior SIPP)

3.70%

3.76%

As of 11 June 2024.

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 currently sits at 4% (20 June), versus 4.17% on 6 June. 

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 Financial Times, 19 June 2024 
2  The Times, 20 June 2024
Money Saving Expert, 20 June 2024

Important information - investors should note that the views expressed may no longer be current and may have already been acted upon. Overseas investments will be affected by movements in currency exchange rates. Reference to specific securities should not be construed as a recommendation to buy or sell these securities and is included for the purposes of illustration only. An investment in a money market fund is different from an investment in deposits, as the principal invested in a money market fund is capable of fluctuation. Fidelity's money market funds do not rely on external support for guaranteeing the liquidity of the money market funds or stabilising the NAV per unit or share. An investment in a money market fund is not guaranteed. The value of shares may be adversely affected by insolvency or other financial difficulties affecting any institution in which the Fund's cash has been deposited. There is a risk that the issuers of bonds may not be able to repay the money they have borrowed or make interest payments. When interest rates rise, bonds may fall in value. Rising interest rates may cause the value of your investment to fall. Tax treatment depends on individual circumstances and all tax rules may change in the future. Withdrawals from a pension product will not be possible until you reach age 55 (57 from 2028). This information is not a personal recommendation for any particular investment. If you are unsure about the suitability of an investment you should speak to one of Fidelity’s advisers or an authorised financial adviser of your choice.

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