Anyone with a mortgage will tell you interest rates have been on a turbulent ride since December 2021. Over the following 18 months, the Bank of England (BoE) raised the base rate 14 times, causing banks to raise their own rates for mortgages and savings.
In mid-2024, the landscape shifted slightly. Interest rates started to fall over the summer as the Cost of Living crisis showed signs of easing. However, in late 2024, optimism is waning about the possibility of further interest rate cuts in 2025.
Why are expectations changing about the monetary policy landscape? How might interest rates affect you in 2025? Below, our Carlisle financial advisers offer some answers as you consider your financial plan over the coming months.
What is happening with Interest Rates?
The UK’s Bank Rate (the base rate) is set by the Bank of England, specifically via its Monetary Policy Committee (MPC). Their last meeting was on 7 November, with the next one scheduled for 19 December 2024.
At the November meeting, the MPC voted to lower the base rate by 0.25%, from 5.00% to 4.75%. The Bank justified its decision partly on the grounds that UK inflation appeared to be slowing down, roughly holding steady at around the Bank’s 2.00% target.
This decision followed the 0.25% cut in August, from 5.25% to 5.00%. However, a more aggressive cut was not taken in November due to the Bank’s concerns about the “stickiness” of UK inflation (especially in the services sector).
Why is Optimism Waning?
Before November, there were widespread expectations of rapid and successive interest rate cuts over 2025. However, two key events have dampened this optimism.
Firstly, the Autumn Statement (delivered on 30 October) announced a series of policies which many regarded as likely to apply upward pressure to inflation.
In particular, the government’s policies amount to nearly £70bn in extra spending over the next five years. This is expected to drive up aggregate demand (AD) and, therefore, inflation. If this transpires, it will likely pressure the central bank to avoid big cuts to the base rate.
Secondly, Donald Trump’s US presidential election victory could also drive up prices in the UK in 2025. Many of President-Elect Trump’s policies announced during the election are expected to add to inflation pressures. Specifically, Trump has threatened to impose widespread tariffs on imports to the US – e.g. a 10% duty on goods and services from Europe.
How is this affecting me now?
Generally, it is expected that interest rates should fall across the economy when the base rate falls. Banks and building societies should “pass down” the savings from lower borrowing costs to their customers to remain competitive.
Interestingly, this has not occurred in November 2024, despite the Bank of England’s 0.25% cut. In fact, several banks have raised their mortgage rates. This appears to be partly driven by the banks’ view on interest rates and future economic conditions (which, as suggested above, could involve higher inflation in 2025, which could lead to higher interest rates for a longer period).
Simultaneously, banks have been more hesitant to raise savings rates. However, some decent deals can still be found on the market – paying up to 5%.
Planning for 2025
Hopefully, the picture we have painted so far shows how difficult it is to forecast interest rates! Unfortunately, nobody has a crystal ball – not even a financial adviser.
However, there are some time-honoured principles that can help you navigate the interest rate landscape in 2025.
Firstly, avoid the temptation to build your financial plan on what might happen. The base rate might rise, fall, or remain largely stable in 2025. Certain variables make any of those outcomes more or less possible at a given time, depending on how they move.
Rather, a wiser approach is to ensure your financial plan has sufficient built-in flexibility to adapt to whatever scenario may arrive. For instance, if interest rates go up in 2025, would you still be able to meet your mortgage payments?
Secondly, try not to focus excessively on one area of your financial plan when considering the base rate. It is easy to assume that only savings and mortgages are affected. However, it can impact other key areas too – e.g. borrowing and pensions.
This highlights the importance of building a holistic financial plan, where all areas of your “financial life” are unified and work together towards common goals.
For instance, if interest rates go up, an individual’s mortgage repayments might rise, but so may the costly debts they might have (e.g. unpaid credit cards). Which one is most vital to address? Where should financial resources be prioritised? A financial adviser can help you here.
We hope this content gave you more clarity on how to plan for interest rates. To discuss your own financial plan, please get in touch to arrange a free, no-commitment consultation with an adviser here in Cumbria.
This content is for information purposes only. It should not be taken as financial or investment advice. To receive personalised, regulated financial advice regarding your affairs please consult your Financial Planner here at Vesta Wealth in Cumbria, Teesside and across the North of England.