The Bank of England (BoE) have again raised interest rates by 0.25% but the big question on everyone’s mind is – When will interest rates come down ?
In an important change in language when delivering todays rate increase it was indicated we should not expect rates to fall any time soon and they will stay higher for longer, but they may not go up much more from here. These words are as important because the (BoE) have picked up that some households and financial markets were assuming that once inflation had tumbled interest rates too would fall but by stating that it will “ensure that Bank Rate is sufficiently restrictive for sufficiently long”, the Monetary Policy Committee is clearly indicating that rates could plateau above 5% across next year into 2025. However, it is also implicitly acknowledging that, at 5.25%, rates are now close to their peak in this cycle of 14 consecutive rises.
The indication rates might not need to go up much more from here reflects that unemployment has begun to rise a little, and there are also now signs of interest rate rises slowing the economy. which is now forecast to avoid recession in 2023 having grown in the second and third quarters. That said 2024 and 2025 forecasts are notably weaker, to the point of stagnation in 2025. Growth of just 0.5% next year and 0.25% in 2025 means the shadow of recession remains.
The message today is that interest rates above 5% are the new norm and we should accept and get used to that.