Important information - the value of investments and the income from them can go down as well as up, so you may get back less than you invest.
The Bank of England has begun cutting rates, but only gradually. Its Monetary Policy Committee (MPC) voted to hold rates at 4.75% in December 2024 after cutting in November.
The outlook for rates has changed meaningfully over the past few weeks with markets pricing in roughly one fewer rate cuts over the next 12 months in December than had been the case in November. Inflation has proved more difficult to shift, with the official rate creeping back to 2.6% and ending the year higher than the Bank had been forecasting. Further increases are expected in the first half of 2025.
The Bank aims to keep inflation close to a target level of 2%. To achieve that, it has been applying higher interest rates to slow the economy down and bring inflation down from the very high levels seen in the past two years.
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Inflation has fallen a long way from its high of 11.1% in October 2022. Meanwhile, growth is running out of steam with the economy unexpectedly shrinking in October. That’s a difficult mix for policymakers - both at the Bank and in Downing Street, where Rachel Reeves has pinned her plans on a recovery to widen the tax base next year and help pay for the government’s huge spending injection. Interest rates staying higher for longer will make that harder, as well as increasing the cost for the Treasury to borrow money.
The next central bank meeting is scheduled for 6 February 2025 followed by meetings on:
- 21 March 2025
- 9 May 2025
- 19 June 2025
What are the latest forecasts?
The speed of rate cuts is not expected to be as quick as was the case earlier in 2024.
November’s Monetary Policy Report forecast another rise in inflation to 2.75% - back above target - over the next year. Higher-than-expected inflation readings since that report suggest the Bank may have been too optimistic, and that rates may have to stay higher for longer.
How forward market interest rates have changed
The path ahead for interest rates, as implied by market prices, has been changing. The chart below shows the implied level of interest rates from the 18 December, 18 November and 18 October.
The most recent (18 December) implied rate in 18 months' time is now 4.16%. The path for interest rate falls has been getting less steep, indicating that the market does not expect rate cuts to come through as quickly as they did a couple of months ago.
The Bank operates in quarter point changes so this rate is only indicative.
What’s happening elsewhere?
America’s Federal Reserve cut rates by a quarter of a percentage point to a range between 4.25% and 4.5% at its December meeting. However, hawkish words from Fed officials suggested that the battle against inflation is still not won and that the Fed would make fewer rate cuts than expected in 2025.
The European Central Bank (ECB) has already cut interest rates to 3.15% and recent comments from officials suggest further rates will follow.
UK mortgage borrowers’ sensitivity to rates
The UK central bank is particularly mindful of the impact rate changes have on UK consumers.
Some markets, such as the US and Denmark, traditionally have mortgage rate terms of 20 to 30 years. In Britain, Canada and much of Southern Europe, short-term deals pervade.
In the UK, most homeowners are currently on a fixed-rate mortgage, making it the most common type of mortgage.
The Bank of England is acutely aware that millions of people have been seeing these arrangements, some fixed at rates below 1%, coming to an end, with those borrowers compelled to take far higher rates.
As of 18 December, the best five-year mortgage rate available was 4.07%, according to broker London & Country, after rising from 4.03% on 1 August.
A peak in savings rates?
Savings rates, of course, are also affected by movements in interest rates more widely. The downward change in forward market pricing has been forcing banks to withdraw some of the best buys on offer.
As of 18 December, the best interest rate that most savers can get on easy-access cash accounts is 4.93%.1 Higher rates are available if you tie money up for periods.
Fidelity: current interest rates we pay on cash
Here are the current interest rates we pay on cash held in our accounts. This includes our -
- Stocks and Shares ISA (including Junior ISA)
- Investment Account
- Cash Management Account
- Self-Invested Personal Pension (SIPP) (including Junior SIPP)
Please note that interest rates can be changed at any time and the rates below have been applied since 1 December 2024.
Account | Gross rate of annual interest | Annual Equivalent Rate (AER) |
---|---|---|
ISA (including Junior ISA) | 3.10% | 3.14% |
Investment Account | 3.10% | 3.14% |
Cash Management Account | 3.10% | 3.14% |
SIPP (including Junior SIPP) | 3.20% | 3.25% |
Source:
Important information - investors should note that the views expressed may no longer be current and may have already been acted upon. Overseas investments will be affected by movements in currency exchange rates. Reference to specific securities should not be construed as a recommendation to buy or sell these securities and is included for the purposes of illustration only. An investment in a money market fund is different from an investment in deposits, as the principal invested in a money market fund is capable of fluctuation. Fidelity's money market funds do not rely on external support for guaranteeing the liquidity of the money market funds or stabilising the NAV per unit or share. An investment in a money market fund is not guaranteed. The value of shares may be adversely affected by insolvency or other financial difficulties affecting any institution in which the Fund's cash has been deposited. There is a risk that the issuers of bonds may not be able to repay the money they have borrowed or make interest payments. When interest rates rise, bonds may fall in value. Rising interest rates may cause the value of your investment to fall. Tax treatment depends on individual circumstances and all tax rules may change in the future. Withdrawals from a pension product will not be possible until you reach age 55 (57 from 2028). This information is not a personal recommendation for any particular investment. If you are unsure about the suitability of an investment you should speak to one of Fidelity’s advisers or an authorised financial adviser of your choice.
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