In June, the Bank of England maintained rates at 5.25% for the seventh consecutive time, even though inflation had decreased to its 2% target. Some economists anticipated a rate reduction in August, but the latest inflation figures indicate that the Bank may delay cuts until autumn.

An interest rate indicates the cost of borrowing money or the reward for saving it. The Bank of England’s base rate is what it charges other lenders to borrow money.

This rate affects what other banks charge their customers for loans, such as mortgages, and the interest they pay on savings. The Bank of England adjusts rates to control UK inflation, which is the rise in prices over time. 

When inflation is high, the Bank may raise rates to maintain it at or near the 2% target, encouraging people to spend less and thereby reducing demand. Once inflation starts to decrease, the Bank may hold or cut rates.

The current Bank rate of 5.25% is the highest level in 16 years. However, it was significantly higher for much of the 1980s and 1990s, peaking at 17% in November 1979. There have been questions about why interest rates have not been reduced, given that inflation is now far below its peak of 11.1% in October 2022.

The main inflation measure, CPI, hit 2% in May and remained unchanged in June—the lowest rate in almost three years.

When inflation reached the 2% target in May, some economists predicted that the Bank would cut rates at its August meeting. However, the Bank also considers other inflation measures when deciding on rate changes, and some of these remain higher than desired. Recent figures indicate that certain parts of the economy, like the services sector—which includes everything from restaurants to hairdressers—are still experiencing significant price increases.

This might lead the Bank to hold rates in August and consider cutting them at its next meeting in September. It must balance the need to slow price rises against the risk of harming the economy and avoid cutting rates only to raise them again shortly afterward.

Although UK inflation has reached the Bank’s 2% target, it is expected to rise slightly over the year before stabilizing in early 2025. This makes it challenging to predict the future of interest rates. 

In May, the International Monetary Fund (IMF) recommended that UK interest rates should decrease to 3.5% by the end of 2025. The IMF, which advises its members on economic improvements, acknowledged the Bank’s need to avoid cutting rates too quickly before fully controlling inflation.

However, in its latest forecast, the IMF cautioned that persistent inflation in countries like the UK and US might necessitate keeping interest rates “higher for even longer.”

According to the government’s English Housing Survey, just under a third of households have a mortgage. When interest rates change, approximately 1.2 million people with tracker and standard variable rate (SVR) deals usually see an immediate impact on their payments.

However, more than 80% of mortgage customers have fixed-rate deals. While their monthly payments aren’t immediately affected, any future deals will be. Mortgage rates are much higher than they have been for most of the past decade, with the average two-year fixed rate now just under 6%, according to Moneyfacts. This means homebuyers and those remortgaging must pay significantly more than if they had borrowed the same amount a few years ago.

About 1.6 million deals are set to expire in 2024, according to the banking trade body UK Finance. You can see how your mortgage may be affected by interest rate changes by using our calculator:

Bank of England interest rates also affect the rates charged on credit cards, bank loans, and car loans. Lenders may increase their rates if they anticipate higher interest rates from the Bank of England. Conversely, if rates decrease, interest payments may become cheaper.

The Bank of England interest rate also impacts how much savers can earn on their money.

Banks and building societies have been pressured to pass on higher interest rates to their customers. The UK’s financial watchdog has warned that banks will face “robust action” if they offer unjustifiably low savings rates.

In recent years, the UK has had one of the highest interest rates among the G7, which represents the world’s seven largest advanced economies.

In June, the European Central Bank (ECB) reduced its main interest rate from a record high of 4% to 3.75%, marking its first decrease in five years. 

Meanwhile, in the same month, the US central bank chose to maintain its key interest rates between 5.25% and 5.5%, where they have remained since July 2023. Although it had previously indicated the possibility of three rate cuts in 2024, the June update suggested that only one cut is now anticipated.