As of September 2023, the Bank of England (BOE) interest rate sits at 5.25% (BOE, September 2023), the highest it has been in 15 years. And that’s not the end of it, as it’s predicted to rise further by the end of the year to an anticipated 5.75%. That means, by the end of 2023, the interest rate will be at its most costly since 2007 (The Telegraph, July 2023).
The background behind these high rates is that in October 2022, UK inflation reached a 41-year high at 11.1%. This rapid increase contributed to the UK's cost of living crisis and many families' ability to afford their outgoings.
Since then, the annual inflation rate has gradually decreased to 7.9% (as of July 2023) due to intentionally increased interest rates.
However, the government has set an end-of-year inflation rate target of 2%, which is still a far-off goal. Therefore, interest rates look like being hiked further in a bid to faster reduce inflation rates and meet that goal.
Why are interest rates rising?
The rate at which inflation increases directly impacts how much things cost. Meaning as inflation goes up, your money affords you less and less.
Between January 2000 and January 2022, inflation varied between 0.8% and 5.5%. (Statista, June 2023). However, due to the increase in gas and oil demand since the COVID-19 pandemic and its reduced availability due to the war between Russia and Ukraine, prices have been forced upward. The war has also reduced the availability of grains, meaning global food prices have risen. As a result, inflation rates began to climb at an unprecedented speed.
To prevent further inflation inclines, the Bank of England has increased interest rates in the hope that the population will be forced to save more and buy less, consequently pushing down the demand for goods and services and leading to lower prices.
When will interest rates rise again?
The current rate is set to be reviewed on November 2nd when it is expected to rise to 5.5%.
It’s also predicted that interest rates will be reviewed again before the end of the calendar year. The rate is expected to then sit at 5.75% for the remainder of 2023.
Currently, it’s also predicted that the interest rate will continue to rise before it reaches a peak of 5.8% in March 2024. However, this estimated peak is 0.2% lower than what had previously been predicted (6%), so exact figures can’t be confirmed.
When will interest rates begin to fall?
As previously mentioned, interest rates are expected to peak in March 2024 at 5.8%. Following that, the rate should slowly decrease.
The current expectation is that the UK will be looking at an interest rate of 4% by the end of 2024 (Berenberg Bank, July 2023). However, it is yet to be seen how correct these predictions will be.
How do these rates impact me?
Universally, increasing inflation rates make goods and services more expensive. That means, no matter your situation, life will cost you more. For the average person, this usually looks like tightening your purse strings, spending less on non-essential items and closely managing your finances.
However, some individuals will benefit from higher inflation rates, including those who own businesses in the energy sector, the food and agriculture industries, commodity investors, banks and mortgage companies and those who own land and/or property.
Rising interest rates impact people differently. Unfortunately, most people are negatively affected by rising interest rates. But, alongside banks and asset managers, there are some people who benefit, and those are people who have cash investments. As the interest rates of cash savings accounts rise, those who have invested their money receive a greater return than they usually would.
So, if you’re looking to boost your finances in a volatile environment, cash management platforms like Akoni might offer you a secure and lucrative option.