Bank of England: Interest rates to remain unchanged at 5.25% - how it will affect you

The Bank of England has maintained its current interest rates of 5.25% for the third time in a row based on recent data indicating potential vulnerabilities in the economy. The Monetary Policy Committee (MPC) of the Bank of England met on Thursday (December 14) to discuss interest rates that impact bank-set mortgage rates.

Having raised interest rates in 14 successive meetings, the central bank reached a peak of 5.25% - the rate setters aimed to curb consumer spending and reduce inflation. However, the MPC opted to keep rates steady in the September and November meetings due to a noticeable slowdown in inflation.

The latest meeting coincides with recent economic data from the Office for National Statistics (ONS) revealing signs of economic cooling. The ONS reported a 0.3% decline in UK gross domestic product (GDP) for October, attributing it to adverse weather affecting the manufacturing and construction sectors.

Additionally, wage growth experienced its sharpest deceleration in two years, with private sector regular earnings rising by 7.3%, down from 7.8% in the previous three months, indicating labour market weakening.

Economists have adjusted their expectations, now predicting interest rate cuts in the coming year. While financial markets initially anticipated a 0.75 percentage point cut in 2024, recent expectations suggest a 1 percentage point drop, bringing interest rates to 4.25% by the end of 2024.

Despite these developments, experts anticipate that the rates will remain unchanged in the upcoming vote and the early months of the New Year. Martin Beck, chief economic advisor to the EY Item Club, said there are no significant economic surprises and expects the December MPC meeting to follow the pattern of the previous two meetings, maintaining the status quo.

He said: "December’s MPC meeting will almost certainly prove the third in succession to deliver no change in interest rates,” he said. "There’s been nothing in the way of significant economic surprises over the last four weeks and inflation and pay growth have slowed (the former by more than the Bank of England expected).”

The Bank of England, led by Governor Andrew Bailey, however remains cautious about rate cuts, citing concerns over persistent inflation. Bailey has indicated that inflation in the services sector, where most consumer spending occurs, is likely to hover around 6% through the start of 2024.

Analysts, such as James Smith from ING, anticipate the Bank to reiterate the need for continued restrictive rates and expect policymakers to address market expectations of three rate cuts in 2024.

He said: “Markets are pricing three rate cuts in 2024 and we doubt the Bank will be too happy about that. Expect policymakers to reiterate that rates need to stay restrictive for some time. We only get a statement and minutes on Thursday, and no press conference or forecasts, so the opportunity to shift the messaging is fairly limited.”

The Bank of England has also warned that nearly a million people could see mortgage repayments soar by more than £500 a month by the end of 2026 as pressure from higher rates continues to feed into the economy.

'Higher interest rates will be around for a while'

Industry players have welcomed the decision but remained cautious due to the interest rates being "historically high". Stephen Sillars, savings and investment editor at wealth app Chip, said: “As expected interest rates have remained unchanged for the third consecutive month. While it’s positive that there hasn't been an increase, households waiting on any relief could be in for a longer wait.

 “With the potential for inflation to still surge, The Bank of England is steadfast in its commitment to keep interest rates higher until the risk diminishes. Although not entirely free from concerns, this strategy seems to be paying off for now as inflation slows.

 “This stabilising picture, coupled with The Bank of England holding the base rate, does not mean we should become passive. With interest rates remaining historically high, there is still time for savers to make their money work as hard as possible and get a great return. It's important to stay focused on short or long term goals and not overlook options for building long-term wealth, such as tax efficient ISAs. Higher interest rates will be around for a while yet.”

Bradley Post CEO of RIFT, said: “While households across the nation may have been hoping for an interest rate reduction in their stocking this December, the decision to hold rates will still be a welcome one as we approach the Christmas break. 

"Many households will be reliant on borrowing to help cover the heightened spend of the Christmas period and so a static base rate will, at least, ensure that they can plan accordingly with greater confidence.”

'Small silver lining'

Amanda Aumonier, Head of Mortgage Operations at Better.co.uk said: “It’s been a tumultuous year for homeowners, we saw remortgage fixed rates surging post the disastrous mini-budget last year and then peaking around 6.16% during August due to base rate hikes. Fortunately, recent positive inflation data means the Bank of England has maintained the base rate, offering a small silver lining for homeowners. 

“The combination of declining swap rates and a challenging housing market has incentivised lenders to slash their rates, bringing the average two-year fixed remortgage rate to approximately 5.24%.

“Precise predictions for 2024 are difficult without a crystal ball because they will depend on inflation trends. Should the current downward trend persist, variable-rate mortgage holders might want to explore fixed-rate options, but it’s important to take all future forecasts with a pinch of salt because multiple factors influence mortgage rates. 

“The fact remains that homeowners approaching the end of their fixed deals are going to have to dig deep to cover the higher cost of their mortgage repayments, with the average two-year fixed rate twice what it was this time two years ago. If you don’t think you’re going to be able to afford your mortgage repayments, don’t bury your head in the sand - speak to your lender as soon as possible - they should work closely with you to help find a solution.”