UK Interest Rates Forecast for the Next 5 Years: What to Expect From the BoE?

UK interest rates are expected to be cut this year after the Bank of England (BoE) succeeded in wrestling inflation back to its 2% target level.

But how low are they expected to go, and what will be the likely impact on savers and borrowers over the next few years?

Our UK interest rates forecast for 2024 and beyond looks at the factors influencing BoE’s decision and how aggressive it will be in making cuts.

We also ask leading financial commentators for their interest rate predictions for the next 5 years now that the economy appears to be on a more stable footing.

Table of Contents Table of Contents

1. Key Takeaways
2. Who Decides UK Interest Rates?
3. What Has Happened to UK Interest Rates?
4. When Will Interest Rates Fall?
5. UK Interest Rates: Winners & Losers
6. Inflation Rate: Factors to Consider
7. Projected Interest Rates in 5 Years: Analysts' Views
8. UK Interest Rate History
9. The Bottom Line: Will Interest Rates Go Down in 2024 in the UK?
10. ??FAQs
11. References

Show Full Guide

Table of Contents

1. Key Takeaways
2. Who Decides UK Interest Rates?
3. What Has Happened to UK Interest Rates?
Show Full Guide
4. When Will Interest Rates Fall?
5. UK Interest Rates: Winners & Losers
6. Inflation Rate: Factors to Consider
7. Projected Interest Rates in 5 Years: Analysts' Views
8. UK Interest Rate History
9. The Bottom Line: Will Interest Rates Go Down in 2024 in the UK?
10. ??FAQs
11. References

Who Decides UK Interest Rates?

We start our UK interest rates forecast by looking at who dictates the level and the factors that go into this decision.

The Bank of England’s Monetary Policy Committee (MPC) is responsible for setting the Bank Rate and keeping inflation at the UK Government’s 2% target level.

The Bank Rate is the interest rate paid to commercial banks holding money with the BoE and changing this influences how much interest banks charge – or pay – their customers.

The MPC is made up of nine people, including the Governor of the Bank of England, each of whom has expertise in economics and monetary policy.

The MPC announces its decision on the level of UK interest rates eight times each year, which works out roughly once every six weeks.

The remaining four confirmed dates for 2024 are August 1, September 19, November 7, and December 19.

What Has Happened to UK Interest Rates?

The Bank of England’s interest rate was increased 14 times between December 2021 and August 2023 in a desperate bid to combat soaring inflation levels.

The cost of living increased sharply during 2021 and 2022 due to strong global demand for consumer goods in the wake of the COVID-19 pandemic and lockdowns.

The situation was exacerbated by related supply chain disruption and soaring energy and fuel prices, partly due to Russia’s invasion of Ukraine in February 2022.

It all meant the annual rate of inflation hit a staggering 11.1% in October 2022, which was a 41-year high and well above the 2% target set by the UK Government.

The Most Recent Interest Rate Decision

The latest BoE interest rate decision came on June 20, 2024, when the Bank’s Monetary Policy Committee (MPC) voted to keep the rate unchanged at 5.25%.

However, the decision wasn’t unanimous and only passed by a majority of 7-2. Those two members wanted to reduce the rate by 0.25 percentage points to 5%.

In a statement, the MPC declared:

“The Committee has judged since last autumn that monetary policy needs to be restrictive for an extended period of time until the risk of inflation becoming embedded above the 2% target dissipates.”

Anyone interested in the interest rate predictions for the UK has to take into account the potential impact on the cost of living.

For example, some people had hoped the rate of inflation having fallen to 2% would have been enough to trigger a rate cut.

However, the BoE has traditionally avoided making such calls in the run-up to the UK’s General Election on July 4, 2024, to avoid accusations of bias.

Myron Jobson, senior personal finance analyst at interactive investor, doesn’t believe that it’s enough that the headline inflation rate has retreated to the target.

“The challenge for the UK central bank is to ensure it stays at that level,” he said. “The fact remains that more good data, particularly on wages, is needed to give BoE policymakers confidence that inflation is truly under control.”

When Will Interest Rates Fall?

Let’s now turn our attention to the UK interest rates forecast for 2025. What are observers expecting to happen over the next 12 months?

Elsewhere, the British Chambers of Commerce has published its UK interest rates forecast for 2026, which covers a slightly longer time horizon.

“It is expected to be cut to 4.35% by the end of 2025 and then to 3.95% at the end of 2026,” it stated. “This is still well above the average for the previous decade.?”

UK Interest Rates: Winners & Losers

The higher interest rate environment that has been in place over the last few years has created plenty of winners and losers.

Savers have been the biggest beneficiaries as banks and building society accounts have been paying them generous interest rates.

However, it’s been a different story for borrowers, particularly those looking to take out a mortgage on a property or remortgage at the end of a fixed rate term.

According to Sarah Coles, head of personal finance at Hargreaves Lansdown, the decision to hold rates steady was “another kick in the teeth” for those on variable-rate mortgages. She said:

“They’ve been holding out for a rate cut for almost a year. They’re still likely to get a cut in August or September, and possibly two by the end of the year, but that’s not going to move the dial anywhere near as much as they would have expected when they remortgaged onto a variable deal in the hope that rates would fall swiftly and often.”

Inflation Rate: Factors to Consider

A lot will depend on what happens to inflation over the next few months, according to Ben Laidler, global markets strategist at eToro. He said:

“The Bank is waiting to see further improvement in underlying inflation pressures, forecasting a 2.5% rate for the second half of the year, and unwilling to wade into the current politicized waters so close to the July 4 general election.”

Nicholas Hyett, investment manager at Wealth Club, believes that inflation is likely to start ticking up again later this summer.

“Wage growth remains high – over 2% in real terms – while the economy is expected to grow 0.5% in the second quarter,” he said.

There will always be winners and losers when it comes to interest rates; it’s important that the BoE remains vigilant, according to David Murray, financial planner at abrdn. He said:

“Longer-term low inflation brings with it stability and affordability that will benefit millions of people who have struggled to grapple with a high cost of living.”

What Will Happen to Mortgage Rates?

So, what are the mortgage rate predictions for the UK?

Mortgage rates are expected to go down in 2024, although it may take longer than anticipated, according to Angela Kerr, director of HomeOwners Alliance.

In an article covering the UK mortgage rates forecast, she pointed out that rates were still much higher than many homeowners had become used to in recent years.

“On 30 May 2024, the average two-year fixed mortgage rate was 5.80%,” she wrote. “While this is a significant drop from its July 2023 peak of 6.86%, it’s still much higher than December 2021 when it was 2.34%.”

Myron Jobson at interactive investor, acknowledged mortgage rates had crept higher on expectations that a cut to the base rate wouldn’t happen immediately.

“Uncertainty over when interest rates will be cut leaves many homeowners, and those aspiring to get onto the property ladder, in limbo,” he said. “Around 1.6 million homeowners are on a relatively cheap fixed-rate mortgage deal that is expiring this year, and the prospect of higher mortgage repayments would add further strain on budgets at a time when other bills have risen.”

However, Rachel Springall, spokesperson for Moneyfactscompare.co.uk, pointed out that some fixed rates are lower than they were six months ago.

“Consumers coming off two or five-year fixed mortgages would be wise to act quickly to grab a competitive deal, particularly as some lenders have withdrawn deals below 5%,” she said.

However, the good news is there are plenty of options for borrowers.

“The mortgage market continues to be fluid despite no change to the Bank of England base rate since August 2023, and market forecasts have pushed back imminent cuts,” she added.

Projected Interest Rates in 5 Years: Analysts’ Views

So, what are the projected interest rates in 5 years? Most analysts are reluctant to make such calls due to the unpredictable nature of economies and markets.

Jason Hollands, managing director at Bestinvest, told Techopedia that it was very difficult to accurately predict a 5-year UK interest rate forecast.

“Five years is so far out, and there are so many unknowns, I wouldn’t predict where rates are likely to be then with any degree of confidence whatsoever,” he said. “I would hazard a guess at around 3% to 3.5%.”

However, anyone trying to formulate a long-term interest rate forecast for the UK needs to accept we’re now living in very different times.

According to Hollands, the “ultra-low levels” experienced until a couple of years ago, which saw the UK bank rate cut to its lowest ever level of 0.1%, are unlikely to be repeated.

This is clearly important to anyone who wants to make a UK interest rate forecast for the next 10 years.

“The prolonged period of ultra-low rates from 2009 to mid-2022 reflected emergency measures in response to the global financial crisis and then the Covid pandemic,” he said. “Prior to the 2008 crisis, rates were typically 4.5% – 6% during the opening years of the 21st century, and in the last 25 years of the 20th century were frequently in double digits.”

The UK interest rates forecast of Ben Yearsley, director of Fairview Investing, is for just one cut to take place in 2024.

“At the start of the year, four to five cuts were envisaged,” he said. “That no longer seems probable as inflation has been stickier as it has come close to target, while growth has remained resilient.”

As far as projected interest rates in 5 years, he isn’t expecting a return to previous rock-bottom levels any time soon. Yearsley said:

“We definitely aren’t going back to 0.1%. One of the reasons inflation has been as bad as it has been is there was too much money printing (quantitative easing ), and rates were held at near zero for far too long.”

UK Interest Rate History

The Bank of England was founded as a private bank in 1694 to act as a banker to the Government. Today, it’s the UK’s central bank.

The interest rate has fluctuated enormously in recent decades. For many years, it was in double figures and actually hit an all-time high of 17% in November 1979.

However, it’s been much lower over the past two decades and fell to an all-time low of 0.10% in March 2020 as the COVID-19 pandemic hit.

Here is a table showing the interest rate decisions since the summer of 2018.

The Bottom Line: Will Interest Rates Go Down in 2024 in the UK?

No one knows for sure, but the general expectation is that UK interest rates will fall in 2024 as long as inflation remains under control.

However, financial observers aren’t expecting a return to the ultra-low interest rate levels seen since the 2008 global financial crisis and the COVID-19 pandemic.

The belief is that the UK interest rate forecast for the next 5 years could see them around the 3% to 3.5% level, but that certainly isn’t set in stone.

Numerous economic and geopolitical factors could influence the future level of UK interest rates, and the rate of inflation will be very high on that list.

??FAQs