What’s next for interest rates and inflation in the UK?

After years of historically low interest rates, the Bank of England (BoE) is steadily beginning to increase the base rate in a bid to tackle soaring inflation. With 12 consecutive rises announced by May 2023, many savers will be wondering what the rest of the year has in store.

Read on to discover if and when interest rates are likely to increase again and what this could mean for savings accounts.

Key highlights

Rising inflation: The BoE has increased interest rates to help curb rising inflation
Future increases: Experts predict that the base rate will continue increasing by 0.25 before reaching a peak of 5% in August 2023
Savings boost: Increases in interest rates could mean you earn more from your savings

What is the current base rate in the UK?

The current Bank of England base rate is 4.50%.

What is the current rate of inflation in the UK?

The current rate of inflation is 8.7%.

What’s happened to interest rates over the last 12 months?

In February 2022, the BoE announced the base rate would increase to 0.5% as spiralling energy costs pushed inflation to a 30-year high. Interest rates rose again in April 2022, and by a further 0.25% in May 2022 to reach 1.00% at the time, the highest level in 13 years. However, with inflation still climbing, the BoE has continued to increase the base rate ever since – and by May 2023, the rate was set at 4.50%, marking the twelfth consecutive rise by the Bank.

Will interest rates continue to rise?

In all likelihood, yes, interest rates will rise again. Raising interest rates is one of the main tools the BoE has to bring down inflation, with the rationale being that higher borrowing costs will mean people are less likely to spend and more inclined to save.

With Russia’s invasion of Ukraine pushing energy and commodity prices even higher, inflation is predicted to reach around 11% in the second quarter of 2023 – well above the bank’s target rate of 2%. Therefore it’s likely we could see further interest rate rises later this year to help limit inflation. The BoE itself has said it, “may need to increase interest rates further in the coming months.”

However, the Monetary Policy Committee (MPC) faces a delicate balancing act. It wants to encourage post-pandemic economic growth, but at the same time it doesn’t want this to lead to rising prices. Whatever happens in 2023, it’s fair to say that households and analysts will be watching the BoE’s next move very closely.

Interest rate predictions for 2023

Commenting on the interest rate increase for August, Raisin UK co-founder, Kevin Mountford said that: “ As central governments around the world look to tackle rising inflation, the UK has faced some criticism, as it is felt by many that it has failed to be decisive enough. It is likely that inflation could hit 11% before year-end and this may also result in interest rates doubling by the year end. Whilst this would represent great news for savers it will put more pressure on households that have a mortgage. This said, over 80% of mortgage customers are on fixed products but around 1.5 million are approaching renewal within the next 12 months, so higher repayments will be on the horizon.

This comes fresh off the back of the Bank of England scrapping the affordability tests that were introduced following the 2008 financial crisis. Basically lenders need to assess a borrower’s ability to repay based on a possible 3% hike against it’s SVR, and in turn avoid the reckless lending that in part fuelled the crisis. This move will be welcomed by many and also remove some of the red tape that surrounded mortgage applications; however we still need to ensure that responsible lending and borrowing remains in place particularly as the current Bank of England base rate might double by the year-end. Beyond a need to try and manage inflation the Government will be trying to unwind the £900bn of financial stimulus provided over the last decade plus look to protect the pound which has continued to slide against the dollar. Many UK adults will not have experienced a period of interest rate rises however compared to years gone by the cost of borrowing still remains relatively low.”

The MPC reviews and announces the base rate eight times a year (approximately every six weeks). You can view the upcoming dates for 2023 on the BoE website.

The indicators to watch

There are many factors that influence interest rates in the UK. These factors are all indicators of the strength of the UK economy, with things such as employment levels and financial growth acting as key metrics.

In the short-term, rising inflation and the ongoing economic repercussions of the pandemic are likely to have the biggest influence on the MPC’s interest rate decisions.

• Inflation – The Consumer Price Index (CPI) is the official measure of inflation in the UK. It measures the annual percentage change in the cost of living and is published by the Office for National Statistics.
• Economic growth – GDP figures and independent growth forecasts show how well the UK economy is performing (or is expected to perform) and are a key factor when setting interest rates.
• Unemployment figures – Labour market statistics can also offer an insight into the overall health of the economy. Interest rates are more likely to rise when unemployment levels are low.

It’s also worth keeping an eye on the MPC’s minutes, which are released following every bank rate decision. They can reveal whether there’s an appetite for interest rate rises or cuts among the MPC’s nine-strong members.

What does this mean for savers?

While rising interest rates may be bad news for borrowers, savers could stand to gain. When the base rate increases, banks typically launch more competitive savings deals, which means you can earn more on your money. And with research suggesting that savvy Brits are more inclined to save following the pandemic, now could be the ideal time to build on these new financial habits and grow your savings.

The best savings account for you will depend on various factors, such as if you have a lump sum to invest and whether you’ll need access to your money. If you can afford to lock your money away for a set period, you might want to opt for fixed interest rate products, such as fixed rate bonds. They offer the most competitive rates of all account types and are ideal for long term savings goals.

Alternatively, you could opt to open a variable rate savings account, such as a notice account, and be in line to take advantage of highly-anticipated interest rate rises as they occur. Not all banks will automatically pass on higher interest rates, however, so it’s important to compare the market to find the best possible rate.

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Start saving with Raisin UK

Regardless of what happens to the interest rate in the UK, there’s never a bad time to save. Whether it’s to take advantage of future spikes in interest rates or to protect yourself and your family from an unseen financial fallout, opening a savings account will give you more for your money.

To find the best savings account for you and compare interest rates on savings accounts, register for a Raisin UK Account and log in to apply.