The latest interest rates are out
Is it a good time to spend or save?
Last updated 2nd Nov 2023
The Bank of England have announced the latest rate of inflation and have kept it at 5.25%
Chancellor Jeremy Hunt said:
"Inflation is falling, wages are rising and the economy is growing.
"The UK has been far more resilient than many expected, but the best way to deliver prosperity is through sustainable growth.
"The Autumn Statement will set out how we will boost economic growth by unlocking private investment, getting more Brits back to work, and delivering a more productive British state."
The pound extended gains against the US dollar after the decision to hold interest rates, standing 0.5% higher at 1.22 US dollars.
But sterling fell 0.2% to just under 1.15 euros.
The Bank of England's forecast shows that the Government is likely to meet its target to halve inflation by the end of this year, but it will take longer to return to the 2% target than previously thought.
The Bank said that Consumer Prices Index (CPI) inflation is likely to be around 4.6% in the fourth quarter, down from its previous 4.9% forecast. The Chancellor had promised to get inflation to 5.4% by the fourth quarter.
Officials had previously thought that inflation would return to the 2% target by the second quarter of 2025. But they revised that forecast on Thursday to say that inflation will remain above 2% until the final quarter of 2025.
The Bank of England expects gross domestic product (GDP) growth to flatline for four consecutive quarters from March next year in a downbeat forecast for the UK economy.
The Monetary Policy Committee (MPC) said that it thinks growth will be 0.6% in each of the last two quarters of 2023 compared to a year earlier and then fall to 0.2% in the first quarter of 2024.
Growth will then drop to 0.0% in the second quarter of next year and stay there until the second quarter of 2025.
The forecast is based on the Bank starting to reduce interest rates in the latter half of next year.
Six members of the nine-person Monetary Policy Committee voted to keep the Bank of England's base interest rate unchanged at 5.25%, but three voted to raise it to 5.5%.
Those who voted for no-change warned that current projections "indicated that a restrictive monetary policy stance was likely to be warranted for an extended period of time," in order to bring inflation back to the 2% target level.
The 6-3 decision was less close than the 5-4 decision to hold rates unchanged at the last MPC meeting in September.
Governor Andrew Bailey said:
"Higher interest rates are working and inflation is falling. But we need to see inflation continuing to fall all the way to our 2% target.
"We've held rates unchanged this month, but we'll be watching closely to see if further rate increases are needed. It's much too early to be thinking about rate cuts."
What do interest rates mean?
Interest rates can impact your financial life in a few simple ways.
When interest rates are high, you can earn more from your savings, but borrowing money becomes more expensive. On the other hand, when rates are low, it's cheaper to borrow, but your savings may not grow as fast. Additionally, interest rates can affect your investments and help control inflation, which can influence your cost of living. So, paying attention to interest rates is essential for making smart financial choices.
Interest rates can affect how much you pay each month for your mortgage. If rates are high, your monthly payment is higher. If they're low, it's lower. Also, the total cost of your mortgage depends on the interest rate. High rates mean you'll pay more over time. Low rates make your mortgage more affordable. Plus, when rates drop a lot, you can refinance to pay less. So, interest rates are important when getting a mortgage.
Interest rates have risen significantly post-pandemic, though they remain low compared to the previous generation.
In the Early 1990s typical interest rates were around 14%.
How have interest rates changed in the UK in recent history?
1990s and Early 2000s: interest rates in the UK were relatively high to control inflation. The Bank of England gradually reduced rates as the economy stabilized.
Mid-2000s: Interest rates decreased to historically low levels before the global financial crisis of 2008, with the Bank of England reducing the base rate to combat economic downturns.
2008 Financial Crisis: In response to the financial crisis, interest rates dropped significantly to stimulate economic recovery. Rates remained near historic lows for an extended period.
2010s: During the 2010s, interest rates remained at historically low levels as the UK grappled with economic challenges and sought to stimulate growth.
Late 2010s and Early 2020s: Interest rates began to rise gradually in the late 2010s, but they remained relatively low. The uncertainty surrounding the UK's exit from the European Union (Brexit) influenced monetary policy.
COVID-19 Pandemic: In response to the COVID-19 pandemic, interest rates were lowered to their lowest levels as part of an economic stimulus effort.
The Bank of England also expects GDP to grow by 0.5% this year, unchanged from its last forecast, but downgraded its outlook for 2024 from 0.5% to 0%.