When will interest rates fall and what should you do?
Ever since inflation started falling from record highs in 2022, anyone who faced the horrible prospect of a remortgage started wondering when the Bank of England (BoE) might cut rates, and whether cuts would come along in time to make their new mortgage less painful.
Then, when the Bank hit the pause button on rate rises almost a year later, hopes started building that a cut might be on the cards. However, here we are over two years down the line, asking the same question: when will rates fall?
Over that time, the answer has changed a little. At the end of last year, the markets were expecting a cut in May. However, when inflation proved sticky in early 2024, it pushed out expectations of the first rate cut to June. Right now, it thinks the chance of a rate cut in June is in the balance, and it could come in August instead.
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Exactly when we get the first cut – and how quickly more follow suit – will depend on the data emerging between now and then. However, an August cut – almost a year on from the first rate pause – would fit with the Bank of England’s clear insistence that it will hold rates where they are for an extended period before considering a cut.
The trouble is that forecasts aren’t guaranteed, and the market is regularly wrong, which makes it difficult to base your decisions on expectations. Anyone who decided to wait things out on an extortionate standard variable rate mortgage since the first rumblings of a cut will have paid through the nose for the delay, while those who switched to a tracker rate in the hope of cashing in on cuts have yet to benefit.
If you’re wondering what to do about your savings, the good news is that in some cases, the future of interest rates is irrelevant. Your emergency savings fund needs to be in an easy access account, so you can get your hands on it in a hurry. You should shop around for the best possible rate today, but you don’t need to think any harder than that.
For any money you need over the next five years or so, but not immediately, you can consider fixed rate accounts. At the moment, variable rates are particularly attractive, and fixed rates – especially over longer periods – are lower, so you may be tempted to keep the cash handy. However, if rates fall as expected, you’ll be grateful that you locked in a decent rate while they were so high.
Remortgagers face an even more difficult dilemma. The Office for Budget Responsibility says the average rate on outstanding mortgages was 2% at the end of 2021. The current average two-year fixed rate is 5.8%, so it’s no wonder so many people are baulking at fixing at these kinds of rates.
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You can hunt around for a deal, and take the plunge now, on the understanding you’re paying as little as possible today and have certainty over the future. Alternatively, you can opt for a variable rate, accepting your rate may be a bit higher now, but if rates do fall from August, you’ll start to see that drop.
In recent months, remortgagers have been increasingly tempted to take the variable rate gamble. It certainly looks like a sensible option at the moment. However, it’s worth bearing in mind that some of those who have taken this approach in the past 12 months are still waiting for it to pay off. If certainty is absolutely essential, a fixed rate is the only way to get it.
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