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Interest Rates May Start Dropping Soon

The front of the stone building of the Bank of England
Author: Samuel Beckingham
Updated: Jan 10, 2024
4 minutes read

At the end of 2023, inflation fell much quicker than expected, which may signal the start of the Bank of England decreasing the Bank Rate. Interest rates for mortgages may also begin to decrease, which will come at a good time for households across the UK, seeing as energy bills increased by 5% at the start of the year.

Surprise Fall in Inflation

In November, inflation fell from 4.6% to 3.9%, which is the lowest level seen for more than two years. Since levels of inflation have been combatted with exorbitant interest rates, the fall from a high of over 11% will be most welcome for anyone with a mortgage. Economists are now predicting that interest rates will start to fall in the first half of 2024, which is much earlier than originally predicted.

Factors at Play

The Office for National Statistics (ONS) attributed the drop in inflation to falling petrol prices and a slight stalling in price rises for food and household goods. Bread and cakes in particular didn’t rise as quickly as previous months.

Despite this, food inflation still remains high, increasing by 0.3% and remaining at 9.2%. Food and non-alcoholic drinks increased more than 27% in the last two years, compared to a 9% increase in the ten years to 2021.

Price Pressures Remain

Despite inflation easing by 0.7%, households across the UK are still in financial strain. Energy bills remain elevated and borrowing costs are high. Even with the hopeful news that inflation is going down, prices aren’t rising as quickly but they are still going up. Additionally, no more widespread government support is in place to help with energy bills.

Bank of England Pressure

Andrew Bailey has often said that easing interest rates is unlikely to happen soon, but in the face of inflation dropping more than expected, it will become hard to keep justifying this decision. As November’s inflation rate was lower than expected, if this trend continued into December, the next announcement from the Bank of England could be a different story.

Stabilising the Markets

Speculation has been underway since the end of 2023 that the Bank of England’s rate setting in May will have to feature an interest rate drop. The question is simply how much it will decrease by. Even a simple 0.25% cut will excite the markets enough to warrant a further drop in mortgage rates.

Some sources expect a fall to 4.25% in the Bank Rate by the end of the year. With previous forecasts expecting inflation to fall back in line at 2% by the end of 2024, this isn’t outside the realms of possibility.

The main trouble is, the Bank of England won’t cut rates too quickly because they are expecting their measures to have a lasting effect. There is always a slight delay between an interest rate rise and any dampening of demand in the economy, not least because a large percentage of households will already be locked into a mortgage deal already.

Offset Cost Increases

While inflation continues to be a problem, there are ways in which you can offset these costs and receive money back.

PPI Tax Rebate

If you ever received a PPI payout, you could be eligible to claim back the tax that was taken off your settlement. Learn why tax was taken and how you can get it back from HMRC.

Mis-sold PCP

Have you ever had a car on hire purchase or personal contract purchase? Your deal may have not been in your favour, so you could be due compensation. Learn more about what you should know about PCP.

Flight Delay

With compensation amounts available up to £520 per passenger, you could turn your delay into a payday. Find out how to claim delayed flight compensation, and how you can be eligible.