When will interest rates go down again and how do they affect mortgages?

The Bank of England has announced a reduction in the benchmark interest rate from 4.75% to 4.5%, marking the lowest level in nearly 18 months. This rate cut is designed to address the economic situation and is likely to have a broad impact on consumers and businesses. It is also the third rate cut since August 2024, demonstrating the Bank of England's determination to tackle economic challenges.

Nevertheless, the Bank of England stated that it would adopt a "cautious" approach to further interest rate cuts. This implies that future interest rate adjustments will depend on the performance of economic data and the future economic outlook. The adjustment of interest rates directly affects the mortgage, credit card, and savings rates of millions of people, making it a closely watched issue.

Interest rates are essentially the cost of borrowing money or the return on savings. The Bank of England's benchmark interest rate is the rate it charges when lending to other lending institutions, and this rate directly affects the mortgage rates and savings account rates that lenders charge their customers. By adjusting interest rates, the Bank of England aims to control inflation in the UK, with the goal of maintaining the inflation rate at 2%.

Predicting future interest rate trends is challenging, but the market generally anticipates more rate cuts in 2025. This expectation is influenced by several factors, including whether the inflation rate can be maintained below the central bank's target level, and the performance of the overall economy. The main indicator for measuring inflation, CPI, was 2.5% in the 12 months to December 2024, which is far below the peak of 11.1% reached in October 2022, but still higher than the central bank's target of 2%.

Bank of England Governor Andrew Bailey stated that the central bank will consider further interest rate cuts, but will adopt a "gradual and cautious approach." He emphasized that the world is full of uncertainty and the road ahead is full of challenges. The central bank is also paying attention to the potential impact of the increase in the amount of national insurance paid by employers and the increase in the minimum wage, both of which will take effect in April. In addition, the potential impact of US President Donald Trump's plan to impose tariffs on key imported goods on the UK is also unclear.

Interest rate changes have a significant impact on mortgage, loan, and savings rates. For about one-third of households with mortgages, interest rate changes directly affect their monthly payments. The mortgage rates of approximately 600,000 homeowners are linked to the Bank of England's interest rate, so changes in the benchmark interest rate will immediately affect their monthly payments. In addition, the interest rates on bank loans, credit cards, and auto loans are also affected by the Bank of England's interest rate. In terms of savings, a decline in the benchmark interest rate may lead banks and financial institutions to lower interest rates on savings accounts, affecting people who rely on savings interest to supplement their income.

In recent years, interest rates in the UK have been relatively high among the Group of Seven (G7) countries. The European Central Bank (ECB) began to lower the main interest rates in the Eurozone in June 2024, which currently stands at 2.75%. In the United States, the Federal Reserve (Fed) has kept interest rates unchanged after three consecutive meetings, with a target range of 4.25% to 4.5%. However, the Fed has indicated that it will cut interest rates at a slower pace in 2025. These international interest rate movements also provide a reference for the Bank of England's decision-making.