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. Bookmark the page or sign up to our Pulse emails for the latest.

The Bank of England (BoE) held rates at 5.25% for the fifth time running (21 March).

At the latest meeting, the Bank's Monetary Policy Committee (MPC) voted by a majority of 8-1 to keep interest rates unchanged. Only one member preferred to reduce rates by 0.25 percentage points, to 5%.

Andrew Bailey, governor of the central bank said it’s “not yet” time to cut rates but emphasised that “things are moving in the right direction.”

Traders are continuing to hold onto hopes that the central bank will cut rates in June. Just yesterday, the Financial Times reported that traders are pricing in a 63% probability of a quarter-point cut by June.

According to the latest yield curves, rates will fall to 5.14% in June and at the end of the year, fall to 4.92%. This forecast reinforces the idea that the higher for longer rate environment is here to stick around.

UK economy grows by 0.1%

UK gross domestic product (GDP) is estimated to have grown by 0.1% in February 2024, according to the Office for National Statistics (12 April).

Production output was the largest contributor to the growth in GDP. It follows a fall of 0.3% in January 2024.

Services output grew by 0.1% in February 2024, while construction output fell by 1.9%. It follows unrevised growth of 1.1% in January. 

Ed Monk, associate director at Fidelity International said, “It has to count as good news that the economy is returning to growth - the GDP estimate today means the UK grew 0.4% across January and February. Last year’s recession appears to have been both shallow and short-lived, but the fact remains that UK growth remains weak.”

Although we may be shaking off technical recession, Ed said it won’t change the feeling that there is very little momentum in the economy.

Ed warned that while today’s reading is positive for growth overall it may end up being bad news for both borrowers and financial markets, in the short-term at least.

“Both are waiting for the Bank of England to cut rates, but wage rises and now better performance in parts of the economy are adding to inflationary pressures. Expectations of rate cuts this year have softened and markets now expect only two cuts before 2025. It seems you can have a recovering economy, or you can have the relief of lower rates - but you can’t have both at the same time,” said Ed.

The Financial Times reported that market traders are pricing in two quarter-point interest rate cuts from the Bank of England.

According to the FT, interest rate swaps market fully priced in a cumulative cut by the end of the year, of around 0.5 percentage points, compared with 0.72 percentage points just two days before.

The uncertainty around interest rates is not just restricted to the UK. Just yesterday (11 April), the European Central Bank held rates once again. Across the Atlantic, the Federal Reserve finally softened its hawkishness as inflation fell but the latest inflation data saw an unexpected rise.

It’s clear the direction of interest rates will not be an easy or smooth journey - recent economic data releases show it is not as predictable as markets once hoped. Central banks across the world may have to err on the side of caution once again. 

How rates forecasts have changed

At the start of the year, markets had been pricing in several interest rate cuts by the end of the year, possibly taking the rate down from 5.25% to 4.5%, as shown in the chart. 

Those expectations had edged back in January but the latest inflation data, in particular, increased the chances of a rate cut. Traders priced in a 40% chance of a first cut in June before the inflation numbers and 65% after the data was released. The probability increased again, to 75%, after the GDP data was published.

Current mortgage and savings rates

2-year fixed mortgage 

5-year fixed mortgage 

Easy-access cash account 

1-year fixed term savings account 

4.62%

4.3% 

5.06% 

5.18% 

As of 12 April 2024
Dates and data to watch:   

  • UK labour market - 16 April 2024
  • Consumer Price Index, March - 17 April 2024
  • Retail sales, March - 19 April 2024

How do rising and falling rates affect investments?

There are many ways that rate movements affect investments. Most people will be all-too familiar with the impact it can have on residential property prices, for instance. 

But it can be nuanced. Consider the impact the recent rises had on growth and value stocks. Growth stocks, which had flourished in the era of low rates, faltered. Companies that are growth focused are often more sensitive to interest rates compared to value stocks. For example, Apple is a very growth focused company. This is because the value of Apple’s shares is determined by the value of all its future cash flows, discounted back to a present-day value. And because of the way investors value future growth, companies which are expected to have a lot of growth in the future are more sensitive to rate rises. 

That’s why last year, when rates rose, growth stocks fell out of favour. Similarly, when rates fall, growth stocks become popular with investors. Even the rising expectation of falls was enough to spur a big rally in the "Magnificent 7" big tech growth stocks at the end of 2023. 

Value stocks, in contrast, perform better when rates are high or rising. Consider BP. It will continue to generate profit and churn out dividends even if it’s in a high interest rate environment. That’s because its value is derived from the profits it makes today and its dividend-paying capacity. 

Another consideration is the impact on money market funds. High rates have improved the rates of return on these funds, which are considered to be low risk. From the Select 50, the Legal and General Cash Trust is currently yielding 4.3%, for instance. Please note this yield is not guaranteed. 


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.

Ashray Ohri, a lead on macro research at Fidelity, said that mortgage rates are inherently linked to the risk-free overnight indexed swap (OIS) rates, which reflect the expectations for the path of Bank rate in the future.

These changes steadily filter through to changes in mortgage pricing. A fall in swap rates in 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.

We hope to provide more information on swap pricing so please bookmark this page and watch out for updates.


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 12 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 5.06%2 although higher rates are available if you tie money up for periods.

The best fixed-term savings account offers 5.18% 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 3.93% (28 March 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, 28 November 2023
Money Saving Expert, 28 November 2023

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. 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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