UK interest rates have been an ever-present fixture of news headlines in 2023.

Interest rate (or “base rate”) changes are one of the main tools the Bank of England (BoE) uses to control inflation, with a target to keep the rising cost of living at 2% a year. This has proved difficult lately.

The Office for National Statistics confirms that inflation has exceeded this 2% target every month from August 2021 to October 2023 (when data was last recorded).

As a result, the UK’s central bank has been increasing its base interest rate. The BoE increased the rate five times in 2023, the end of a sequence of 14 consecutive rate increases that started in December 2021. The base rate in December stands at 5.25%.

Keep reading to find out how we got here, where interest rates could go next, and what that might mean for your wealth in 2024.

Interest rates might already be at their peak, but no one can know for sure

After two years of steadily increasing rates, you might be wondering: “Where will interest rates go next, and when will they peak?”

Times Money Mentor recently reported that many experts believe that interest rates have peaked. Indeed, the 5.25% rate has remained fixed at the last three meetings of the BoE’s Monetary Policy Committee (MPC).

The report goes on to quote research from Capital Economics suggesting the base rate might fall to 3% by the end of 2025. Berenberg Bank, meanwhile, predicts a fall to 4% by the end of 2024.

In reality, no forecasters have divine knowledge of the future. Significant global events, such as the Covid pandemic, can prompt the BoE to react so predicting where rates will go next is enormously difficult.

Savers should see more of these increases passed on to them

The base rate generally dictates the rates banks and building societies offer to savers so the other big question is whether rate increases have been passed on

Initially, this appears not to have been the case. Financial Conduct Authority (FCA) figures from July show that, for accounts held with the nine largest firms, only 28% of the base rate had been passed on.

That said, in its latest review in December, the FCA confirmed that savings rates had improved. The regulator found that the average rate on easy access deposits had increased from 1.66% in July 2023 to 1.99% by October.

While banks and building societies were slow to pass on rate increases to begin with, this has improved. That said, with the base rate at 5.25%, an average rate of 1.99% remains far below the central rate of interest.

Interest rate increases have reportedly hurt the UK economy

Base rate increases are designed to encourage saving and reduce consumer spending. This tactic, though, has seemingly harmed the UK economy.

The BBC reported in November that interest rate rises meant the UK economy failed to grow between July and September.

Meanwhile, the Office for Budget Responsibility (OBR) noted that past rises in interest rates are yet to have their full effect. Over half the impact from two years of interest rate increases is still to be felt.

These forecasts mean that there may be troubling times ahead for the UK economy – although the OBR’s November 2023 forecast for real GDP growth is actually higher than it was in March.

Fluctuating interest rates can affect various aspects of your wealth

It’s crucial to be aware of the impact that changing interest rates can have on your wealth, from your mortgage and savings to your long-term finances.

Savings

Times Money Mentor confirms that the average easy access savings account interest rate in December 2021 was 0.19%. In December 2023, this had risen to 3.17%.

However, it might still be sensible to invest over the long term, as figures from Barclays show.

The bank compared the returns on £10,000 that was either saved in an everyday savings account or invested in UK shares between March 2018 and the end of February 2023.

At the end of these five years, this £10,000 would have been worth:

• £10,068 in the savings account, a return of 0.7%

• £12,754 in UK shares, returning 27.5%.

While past performance isn’t necessarily indicative of future growth, the potential for invested wealth to outpace savings remains.

Mortgages

When interest rates rise, mortgage deals can follow suit. This won’t affect you in the short term if you are on a fixed rate. However, if you are on a variable- or tracker-rate mortgage, you could face increased costs as these typically rise in line with the base rate.

Meanwhile, you could face higher costs when your current fixed-rate deal ends.

FTAdviser reports that 1.6 million mortgage deals are due to end in 2024, with many Brits facing significant mortgage hikes next year.

In the long term

No one knows exactly how long rates will be higher for, or whether they will drop in the future. Either way, it’s worth keeping in mind what a long period of higher rates could mean for you.

Generally, higher costs of borrowing on mortgages and other loans can squeeze your household finances. Even if this is partially offset by additional interest, it may still put pressure on your budget.

With uncertainty over how inflation will behave in the coming months, and no consensus on when or by how much interest rates will fall, it’s important to consider these higher rates in your financial planning.

Get in touch

No matter what happens to interest rates this year, our team at Expert Wealth can help you manage your money for the coming year.

With decades of experience, our Chartered Financial Planners have the expertise to help, so get in touch and speak to us today.

Please note

This blog is for general information only and does not constitute advice. The information is aimed at retail clients only.

The value of your investment can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.