An Ever-Changing Market: The Journey of UK Interest Rates

The Bank of England

In the UK interest rate market, we have been fortunate over the past three years. However, we have now entered a phase of high inflation, which has consequently led to higher interest rates.

What have we witnessed?

If we take a long-term view over the last 50 years at interest rates, we can observe that the market has consistently changed. Factors such as shifts in government, financial crashes, global pandemics, and general cost-of-living crises have all impacted interest rates, either pushing them up or bringing them down.

During the Thatcher government, interest rates reached a staggering 17%, a significant increase from 5.5% in 1977. By the end of 1978, rates had risen to 12.5%, gradually climbing to 17% by 1979. From then on, rates slowly and steadily decreased with some natural fluctuations until 2007. The average interest rate from 1971 to 2023 was 7.11%, with the highest rates at 17.99% and a record low of 0.10% in March 2020.

Graph Data Source: Bank of England

Where do we stand now?

Currently, we find ourselves in a higher-than-preferred inflationary environment, leading to higher interest rates as a means for the Bank of England to combat inflation. The increase in interest rates can be attributed to the after-effects of Brexit, the fallout from COVID-19, the war in Russia and Ukraine, and the general cost-of-living crisis.

Presently, payable interest rates range from 5% to 6%. Although this may seem high compared to the past few years, it is still a favourable interest rate environment. In the early 1990s, when inflation was at its current level, interest rates were over 13%. While it is unfortunate that rates are currently much higher than what we have become accustomed to, we can observe that the country, government, and Bank of England have gained better control over interest rates than in the past. Therefore, we can have more confidence in the market’s future trajectory.

What lies ahead?

Our outlook for interest rates is generally positive, with current market predictions indicating a decrease next year. Currently, the market shows that 5-year fixed funding is cheaper than 2-year fixed funding, suggesting a trend toward lower long-term interest rates.

Historically, such a pattern has signalled a recession, during which interest rates tend to fall considerably. Additionally, other factors to consider are potential changes in government, which, although not directly impacting interest rates, tend to have some influence.

What does this mean for me?

If you have an existing mortgage, it would be prudent to secure a new rate as soon as possible, provided you are within a 6-month window of your current mortgage coming to an end.

For those looking to purchase a property, our advice is not to base your decision solely on the ever-changing market. The landscape can shift rapidly, as demonstrated above, and attempting to time your purchase based on predictions can be risky. Instead, let your personal needs guide your property goals, rather than making a guess about what may happen next and risking further delays in joining or rejoining the property ladder.

For more expert guidance and advice, please do not hesitate to get in touch with our specialist team of advisers.

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