UK economic update Autumn 2023
Stronger signals that interest rates are nearing their peaks
Updated 18 October 2023
The key economic move over the last few months was the Bank of England’s decision not to raise interest rates in September. Keeping the rate fixed at 5.25% (still the highest rate in 15 years) was the first time the Bank’s rate-setting committee had not raised rates since November 2021, and it indicated that the Bank felt that inflation was starting to come under control. The official inflation data showed that the pace of price rises in the UK fell to 6.7% in August, down from a peak of 11.1% in October last year. Core inflation also fell back slightly in August. Inflation stayed pegged at 6.7% in September, a slight surprise to the upside. Core inflation ticked down again to 6.1%. The Bank’s rate setters will take this into consideration when it next meets in early November.
The central bank was careful not to rule out increasing interest rates again in the future, and economists believe that rates will stay elevated until well into next year before they start to fall back. There is an additional concern than increased geopolitical tensions could push oil prices higher, which would reverse some of the falls in inflation.
Slightly weaker economic data, both in terms of GDP growth and employment levels, also indicate that the Bank’s moves over the last two years are having an impact. The IMF released new forecasts indicating that the UK economy would grow by just 0.6% next year, which attracted some criticism for being too gloomy. But the Treasury’s monitor of independent forecasts showed that UK economists expect 0.5% growth in 2024. The IMF also said interest rates would stay elevated at around 5% until 2028, but some economists predict a rapid decline in rates in 2025.
Homeowners shifting off very low-rate fixed-rate mortgage deals agreed two, three or five years ago will also feel the impact of higher interest rates over the coming year. It’s estimated that 1.6 million homeowners will have re-mortgage, often paying a significantly higher monthly sum, this year alone. The Bank of England has calculated that around one million borrowers will pay an extra £500 a month on their mortgage by 2026.
The good news for borrowers is that there is increasing competition in the mortgage market, which is putting some downward pressure on home loan rates. Still, a return to ultra-low mortgage rates experienced between 2010 and 2021 at any time in the short or medium-term is very unlikely, which will put more pressure on some household finances through 2024 and beyond.
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