Kevin Peachey Cost of Living Reporter 16 July 2021
Updated July 17, 2024
Interest rates affect mortgage, credit card and savings rates for millions of people across the UK.
The Bank of England kept interest rates unchanged at 5.25% for the seventh consecutive time in June, despite inflation falling to its target of 2%.
Some economists had expected rates to fall in August, but the latest inflation figures suggest the bank may not cut rates until the autumn.
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, the bank may decide to raise interest rates to keep inflation at or close to its 2% target.
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%.
When inflation hit its 2% target in May, some economists predicted the bank would cut interest rates at its August meeting.
But banks also consider other inflation measures when deciding how to change interest rates, some of which remain higher than banks would like.
The latest figures show that parts of the economy are still seeing strong price increases, such as the service sector, which includes everything from restaurants to hair salons.
This could mean the bank keeps interest rates on hold in August and then decides to cut rates at its next meeting in September.
They must balance the need to slow inflation with the risk of damaging the economy, and avoid raising interest rates again immediately 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.
The International Monetary Fund recommended in May that Britain's interest rates should be cut to 3.5% by the end of 2025. The organisation, which advises member states on how to improve their economies, acknowledged that banks 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 the changes won't affect their monthly payments immediately, they will have an impact on future loans.
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 deals are due to expire in 2024, according to banking industry body UK Finance.
You can use our calculator to see how changes in interest rates will affect your mortgage.
The Bank of England interest rate also affects the amount you are charged for credit cards, bank loans and car loans.
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.
What happened to interest rates in other countries?
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.
The Fed had previously signaled the possibility of three rate cuts in 2024, but in June signaled it expected just one rate cut.