UK interest rates: how far will rates fall and how should you respond?

Analysts expect savings rates of 4% and mortgages around 5% to be the new norm. So what should you do now to make the most of your money?

Interest rates are expected to fall this year – but how low will they go and what impact will this have on savers and borrowers?

The Bank of England increased interest rates 14 times since December 2021 in a desperate bid to combat soaring inflation. 

But after standing at 5.25% since August 2023 – and with inflation now close to the 2% target – most economists believe their next move will be down.

Here we look at how many interest rate cuts there could be this year, the level to which they’re likely to fall and how this will affect our lives.

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How many cuts should we expect?

Opinions vary between financial commentators.

Ben Yearsley, investment consultant at Fairview Investing, predicts there will be at least one cut this year in the UK – and one in the US.

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

However, Sarah Coles, head of personal finance at Hargreaves Lansdown, believes there could be a more significant move downward over the coming months.

“At this stage, we’re expecting two or three cuts before the end of 2024 – which could take us down as low as 4.75% or 4.5%,” she said.

The International Monetary Fund (IMF), meanwhile, has suggested there could be seven cuts by the end of next year, taking the rate down to 3.5%.

When will the first cut take place?

Expectations of a summer rate cut were dashed when April’s inflation data came in slightly higher than hoped, – according to Alice Haine, personal finance analyst at Bestinvest.

“Inflation may be heading in the right direction, falling to 2.3% in the 12 months to April – the lowest level in almost three years – but failed to fall as close to the BoE’s target of 2% as hoped,” she said.

There’s also the little matter of Prime Minister Rishi Sunak announcing that the country will go to the polling stations in early July.

“Since becoming independent in May 1997, the BoE has never cut rates in the run-up to a general election, so this potentially rules out any immediate action - though never say never,” she added.

Sarah Coles at Hargreaves Lansdown agrees on the timescale.

“The market is currently pricing in a cut in September, although there’s still a reasonable chance that we could get one in August,” she said.

How low will interest rates go?

While nothing is certain in these volatile times, there is consensus among financial commentators that the days of rock-bottom interest rates are over – in the short to medium term at least.

According to Sarah Coles at Hargreaves Lansdown, recent rate movements must be put into context because they’ve been so unusual.

“It’s important not to assume rates going back to normal is necessarily a return to 2% or less,” she warned.

“Since 1975, rates have only fallen lower than 3.5% in the years since the global financial crisis.”

Fairview Investing’s Ben Yearsley believes 4% could eventually become the new normal for UK interest rates.

“We definitely aren’t going back to 0.1%,” he insisted.

“One of the reasons inflation has been as bad as it has is too much money printing and rates held at near zero for far too long.”

“If the new normal is, arguably, 4% in the UK, savings rates will be similar and fixed-rate mortgages will settle about 5%,” he added.

“If there’s a big recession then the Base Rate will start with a three.”

The impact of lower interest rates

Should interest rates bottom out at the 3.5% to 4% level over the next couple of years, this is likely to have a significant impact on borrowers and savers.

Bestinvest’s Alice Haine believes just one cut could have a positive effect on mortgage products for borrowers.

“Those who want to see even better deals might want to wait for two or three rate cuts to feed into the market before signing on the dotted line,” she added.

Variable rate deals will move as soon as the first cut takes place, whereas fixed rates are based on future expectations, according to Hargreaves Lansdown’s Sarah Coles.

“It means if rates fall as expected later this year, we may not see any particularly dramatic changes,” she explained. “These are more likely to kick in when the market starts pricing in more substantial rate cuts.”

The mortgage market continues to be fluid, according to Rachel Springall, finance analyst at Moneyfacts.

“Fixed rates are lower than six months ago,” she said.

“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 priced below 5%.”

What should savers do? 

Springall believes that consumers expecting interest rate cuts may want to grab a deal quickly before any Bank of England announcements and lock into a fixed-rate deal.

“Variable savings rates can change at any time and, as we have seen in the past, a Base Rate cut can have a detrimental impact on the savings market,” she said. 

Those prepared to lock their cash away for a guaranteed return could grab a one-year fixed rate bond as some still pay over 5% – despite the expected cuts.

“Many of the top rate deals can be cut or withdrawn quickly if providers face an influx of deposits, so savers need to keep a close eye on the top rate tables to not be left disappointed,” she added.

This article doesn't constitute financial advice. Consider speaking to a financial advisor before making any decisions with your money.