Will interest rates go up again in the next few months?
Currently, the Bank of England (BoE) base rate stands at 3.75%, the lowest it’s been since 2022. But with trouble in the Middle East pushing up inflation can it stay there much longer?
Interest rates have fallen from their recent high of 5.25% in July 2024, as inflation seemed to finally come under control – but a soaring oil price has affected energy and petrol bills in the UK and that might see the Bank of England act soon to try and keep a lid on price rises.
But will interest rates go up again in the battle to reduce inflation? Here’s what you need to know.
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Will interest rates go up?
Interest rates are notoriously tricky to forecast in the long or even medium term. That’s because they ultimately depend on what the BoE’s Monetary Policy Committee thinks is the best way of ensuring the UK’s economy is in a healthy condition and inflation is under control.
Inflation rose this month to 3.3%, up from 3% the month before, but it is still a long way from recent peaks after the Russian invasion of Ukraine. But that smaller number is still well above the Bank of England’s 2% inflation target.
Experts feel it’s unlikely a single rise in inflation will be enough to make the Bank’s rate-setting Monetary Policy Committee act this spring, but if things keep going up there could be more rate rises to come over the summer and into the autumn.
But inflation isn’t the only thing the Bank looks at when stting rates. It’s also got an eye on things like economic growth, wage rises and employment figures.,
That leave a balance between keeping the economy going – which normally means low rates – and keeping a lid on price rises, which it tries to do by raising rates.
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How high could interest rates go?
You can get a rough idea of how high interest rates are expected to go by looking at something called the overnight swap index (OIS) forward curve.
Now although it sounds a bit technical, this curve simply forecasts what interest rates could be in the future based on how investors are pricing interest rates into the market.
Currently, the OIS curve indicates that interest rates could reach around 4.25% by the end of the year.
However, there is speculation that interest rates actually fall too, if the economy takes a hit and the oil-based price rises are reversed.
Now, although forecasts can be helpful to get an idea of what might happen, it’s important to remember that as with any economic predictions, they should be taken with a pinch of salt.
They are just a guide and rates may behave in a totally different way.
For example, back in June 2022 market predictions implied that interest rates would peak at 3.3% the next year. In reality, the BoE surpassed that forecast by December 2022 when rates increased from 3% to 3.5% and rates had hit 5.25% by September 2023.
Could interest rates go down?
Interest rates may fall if inflation decreases in line with the BoE’s target.
At the last meeting in March, members of the Monetary Policy Committee said that without the disruption in the Middle East, they would have voted for a cut in interest rates.
Therefore, in theory, there is the possibility that interest rates may go down in the near future if the war in Iran ends and the Strait of Hormuz reopens.
However, the Bank is keenly aware of our recent history with inflation spikes, so is also trying to ensure that if prices look like they will stay high for any length of time they take action (ie raise rates) to keep a lid on spiralling costs.
It’s also worth pointing out that even if interest rates do start to fall – it won’t be by much. And, we probably won’t see interest rates go back to the historic lows of less than 1% we’ve had over the last decade and a bit.
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How does the base rate decision affect you?
The BoE base rate influences the cost of borrowing and savings rate that may directly impact your finances.
Typically, higher interest rates mean that the cost of borrowing becomes more expensive.
For example, if you have a variable-rate mortgage or a tracker mortgage, the cost of your repayments may increase if the base rate does.
Generally speaking, higher interest rates are good news for savers as providers tend to increase the return you can make from your money.
Currently, some of the best savings accounts offer around 4.5% AER with an easy-access account and 7% AER on a regular savings account.
Check out our article on what an interest rate rise means for you for more information.
Why is inflation rising?
In a word – war. Higher energy costs thanks to the war in the Middle East are feeding through to petrol prices, natural gas prices and even making things like fertiliser more expensive.
The current inflation rate is 3.3%, up from 3% just a month before.
The worry is that these increases now impact more than just those things. Energy is used to power shops, warehouses and factories as well as warm our homes. Petrol and diesel are used in the ships, lorries and more that deliver goods, not just to our doors but to factories and supermarkets too.
Rising fertiliser costs put pressure on farmers long before the crops are harvested and sold. And that’s without even mentioning the fact that farms use a lot of energy and need fuel for agricultural equipment too.
More or less everything we buy either contains steel or is made with things that contain steel – and steel uses a lot of energy to forge.
That means that the higher prices for motor fuel, fertiliser and energy can lead to higher prices months after any disruption in the price of oil ends.
However, we’re still only a few weeks in to the war with Iran, and a quick resolution there could equally mean prices fall fast and this disruption is merely a blip that goes away before the Bank of England even needs to act at all or higher prices are locked into the supply chain.
If you’re concerned about managing price rises, it’s always worth checking whether you’re eligible for financial support.
The government’s benefits and financial support checker can help you find out if you’re eligible to claim help with the cost of living.
