Interest rates in the UK

Interest rates at a glance

Interest rates are pretty daunting right now, but much to our surprise, (and maybe providing some slight comfort) the history of UK interest rates shows we've endured much greater levels of volatility and higher rates.

Looking at the UK interest rate history, in the last 50 years, interest rates went to the extremes, breaking records at both ends of the spectrum. Picture this: A high of 17% in November 1979 and a low of 0.1% in March 2020.

The highest base rate at 17% was introduced to combat soaring inflation. When the Bank of England raises the interest rate, businesses and individuals are less likely to take out a loan due to high borrowing costs, reducing spending. This spending reduction helps slow inflation because of the low demand for goods and services.

By contrast, the central bank slashed the base interest rate to its lowest level when the Covid-19 pandemic hit, to increase spending and support the economy.

The graph below shows the UK interest rate history over the last 50 years.

Interest rate trends

The UK interest rate has been on a rising trend since December 2021, from 0.25 percent to 0.5 percent for the first time in a decade. Since then, the monetary policy committee has raised the base rate 14 times in a row, to 5.25 per cent in August 2023, to reduce inflationary pressures. This is the highest level since February 2008, before the global financial crisis.

When asked about the rising interest rate, one of Sprive’s customers Hanna Stevens said:

“The high interest rate is hellish. I have friends looking to move to their second home, who have just had a baby, but can't afford the houses they thought they should be able to look for due to the monthly payments. Even with the higher deposit created by their increased equity in their current house. It's saddening. I'm dreading when it's us and can only hope the interest rate goes down a wee bit by then. Things are tight enough as they are."

By raising interest rates, the central bank aims to decrease inflation by making borrowing money more expensive and saving more attractive. This should dampen consumer spending and business investment, which are the main drivers of demand and economic growth. Less demand means less pressure on prices, which should eventually bring inflation down.

Bank Rate Predictions

The annual inflation rate fell from 6.8% in July to 6.7% in August. It's the third month in a row that the figure has dropped. This slow downward trend has influenced the central bank to leave interest rates unchanged at 5.25 percent. According to the Bank of England’s latest report in August 2023, inflation is expected to fall significantly further to around 5% by the year-end and return to the target of 2 percent by Q2 of 2025. This could signify the end of rising interest rates. In alignment with this prediction, Berenberg Bank’s forecasts indicate that the Bank of England will lower current interest rates to 4% by the end of the year. However, financial markets anticipate a slight further increase in the base interest rate, with some predictions suggesting a peak between 5.5%- 5.75% by the year-end.

Jinesh Vohra, CEO of Sprive comments:

“Trying to precisely forecast the interest rate trajectory five years ahead is akin to attempting to predict the weather – an inherently challenging task. Prior to the recent sharp increase in rates, we experienced more than a decade of exceptionally low-interest rates following the 2008 financial crisis. While I would certainly welcome a return to such favourable conditions, I must admit that I would be genuinely surprised if rates were to plummet to those exceptionally low levels in the foreseeable future.”

Impact on Homeowners

Higher monthly payments have led to significant effects on the UK housing market. Higher interest rates mean higher mortgage payments for those who have variable-rate or tracker mortgages, which are linked to the Bank Rate. A mere percentage point increase in interest rates significantly impacts monthly payments for loans and mortgages, affecting people's spending patterns. Higher house prices reduce their disposable income and spending power. However, those who have fixed-rate mortgages, which are not affected by the Bank Rate, will not see any change in their mortgage rates until their fixed-rate deal ends. Higher interest rates also tend to lower house costs, as fewer people can afford to buy or move homes. House sellers in the UK are reducing their property prices at the quickest rate in over ten years, following decreased demand due to high-interest rates. Based on the Rightmove House Price Index, 36.3% of the properties currently on the market have experienced a price reduction, averaging at £22,700 nationally.

Impact on Renters

Renters may experience indirect effects of interest rate fluctuation as landlords adjust rental prices based on market conditions.

On the one hand, higher interest rates could reduce the demand for rental properties, as rising prices may cause some renters to buy instead or move to cheaper areas. This could lower rents and increase the availability of rental properties.

On the other hand, higher interest rates could increase the prices for landlords who have mortgages on their properties, and they may pass on these costs to their tenants by raising rents. Rents for homes across the UK are increasing at an unprecedented pace, driven by high interest rates raising costs for landlords.

According to the Hamptons, the average annual rental growth rate for newly leased properties reached 12.0% in August, marking the fastest growth since the inception of the index in 2014.

The graph below illustrates the rise in rents as a result of a high base rate.

Impact on Companies

Businesses feel the impact of changes in interest rates with high base rates increases the cost of borrowing, hampering business expansion and economic growth. Approximately 7,000 businesses are expected to fail every quarter in 2024 as high-interest rates cause financial strain, making it difficult for businesses to repay lenders. UK business loans are expected to rise to approximately £513 billion in 2023. This represents an 18% rise from £78 billion in 2018.

Generally speaking, high-interest rates result in high rates of business insolvencies caused by unsustainable levels of debt repayments. One in every two companies is likely to face stress in servicing debt by the year-end, causing some owners to cut employment significantly.

High levels of debt have led some companies in the UK to consider alternative strategies to pay off their debt. The largest pub chain in the country, Stonegate, considered selling 1,000 of its establishments and using the money to service its debt. It is now trying to move the pubs into a new entity in order to raise debt.

A pullback in consumer spending has made it increasingly difficult for companies to pay their debts. About two-thirds of British adults have cut back on discretionary purchases and retail sales are almost flat by volume. As a result, one in every two companies is likely to face stress in servicing debt by the end of the year, causing some owners to cut investment in research and development along with employment significantly. This could create a ripple effect across the economy, resulting in slowed economic growth.

Impact on Food Shops

Fluctuations in interest rates can also affect the cost for grocery products. High interest rates may lead to increased borrowing costs for food shops, which could be passed on to customers through higher food prices. Food and drink prices rose by 19.1% in March 2023.

Off the back of rising costs, Sprive introduced our Shop with Sprive feature which gives customers cashback on their everyday shopping to put towards their mortgages. We partner with some of the biggest brands in the UK including ASDA, M&S, Airbnb, Deliveroo and many more! This feature essentially helps homeowners pay off their mortgages while shopping.

You can see how much you save towards your mortgage with our Shop with Sprive calculator.

One of Sprive’s customer James Davies says: “I managed to overpay over £100 per month entirely through cashback on vouchers. I tell everyone I know about Sprive!”

Moving Forward

Jinesh Vohra, CEO of Sprive, is urging homeowners to stay well-informed, budget effectively, and manage their personal finances to the best that they can to help navigate the ever-evolving financial landscape.