Kevin Peachey Cost of Living Reporter 16 July 2021
Updated June 20, 2024
The Bank of England kept interest rates unchanged at 5.25% for the seventh consecutive session.
UK inflation hit the bank's 2% target in May, but interest rates are not expected to fall until the bank is confident that price increases have stabilised.
So analysts believe we may have to wait a while longer before we see a significant drop in mortgage costs.
Interest rates affect mortgages, credit cards and savings rates for millions of people across the UK.
What are interest rates and why do they change?
Interest rates tell you how much it will cost to borrow money, or how much you will get in return if you save it.
The Bank of England's base rate is the interest rate that other lenders charge you to borrow funds.
This affects the fees other banks charge customers for loans such as mortgages, as well as the interest they pay on savings.
If inflation is high, a central bank, which has a target of keeping inflation at 2%, may decide to raise interest rates.
The aim is to encourage people to spend less, reducing demand and thus controlling inflation.
If this starts to happen, banks may decide to keep interest rates steady or even cut them.
When will UK interest rates fall?
The current bank rate of 5.25% is the highest in 16 years.
However, for much of the 1980s and 1990s it was significantly higher, reaching 17% in November 1979.
Questions are being raised as to why interest rates have not been cut even though inflation remains well below its October 2022 peak of 11.1%.
But banks also consider other inflation measures when deciding how to change interest rates, some of which remain at higher levels than banks would like.
As a result, previous thoughts of a spring rate cut have been revised, but a cut in August is still possible.
Banks must balance the need to slow inflation with the risk of damaging the economy or being forced to raise interest rates again soon after cutting them.
How far could interest rates fall?
UK inflation, while at the Bank's 2% target, is expected to rise slightly throughout the year and then level off in early 2025, making it difficult to predict exactly what interest rates will do.
But the body, which advises member countries on how to improve their economies, acknowledged the bank needed to balance the risks of not cutting rates too quickly before inflation is under control.
How do interest rates affect me?
When interest rates rise or fall, the roughly 1.2 million people on tracker and standard variable rate (SVR) contracts typically see an immediate change in their payments.
But more than eight in 10 mortgage borrowers have fixed-rate contracts, and while their monthly payments won't be affected immediately, future contracts will.
Mortgage rates are much higher than they were for most of the past decade, with the average two-year fixed rate now sitting just below 6%, according to financial information service MoneyFacts.
This means that homebuyers and those refinancing their mortgages will have to pay much more than they would have if they had borrowed the same amount a few years ago.
Around 1.6 million transactions are due to expire in 2024, according to banking industry body UK Finance.
You can use our calculator to see how interest rate changes will affect your mortgage.
The Bank of England interest rate also affects the amount you are charged for your credit card, bank loan and car loan.
Lenders can decide to raise interest rates if they expect the Bank of England interest rate to rise. However, if interest rates fall, interest payments may become cheaper.
Image credit: Getty Images
Image caption: Low interest rates are good for borrowers, bad for savers
Bank of England interest rates also affect how much return savers can earn on their deposits.
Individual banks and building societies have come under pressure to pass on higher interest rates to customers.
There are some good deals on the market, and experts say customers should shop around because if they have money in their account, they may earn little or no interest.
Are other countries also raising interest rates?
In recent years, the UK has had some of the highest interest rates of the G7, which represents the world's seven largest so-called “developed” economies.
The European Central Bank cut its key interest rate to 3.75% from a record 4% in June, the first cut in five years.
In March, it suggested three cuts could come in 2024.