This content is for information and inspiration purposes only. It should not be taken as financial or investment advice. To receive personalised, regulated financial advice please consult us here at Elmfield Financial Planning in Padiham, Burnley, Lancashire.
Interest rates have been steadily falling across the Western world in 2024. The European Central Bank (ECB) cut rates twice in three months, now at 3.65% for main refinancing operations. In the US, the Federal Reserve made an aggressive half-point cut in September. The Bank of England (BoE) also cut the base rate from 5.25% to 5% in the same month.
Naturally, these events raise important questions for UK households. Will rates continue to fall over the coming months? If so, what might the impact be on financial planning? Below, our Burnley financial planners examine these questions in more detail.
We hope these insights are helpful to you. Please contact us for more information or to discuss your financial plan with us.
Why are interest rates falling?
Across the world, wholesale prices for food and energy rose after Russia’s invasion of Ukraine in 2022. Sanctions on the former (the third-biggest world oil supplier) helped push up oil and natural gas prices. Disruptions to supply chains and production centres in Ukraine (which supplies 50% of global sunflower oil exports) also caused a supply-side shock in many countries, including the UK.
To prevent prices from rising out of control, western nations largely raised interest rates. In the UK, the CPI (Consumer Price Index) peaked at 11.1% in October 2023. Over 18 months, the BoE raised interest rates 14 times. Rates were finally held steady for twelve months in August 2023 at 5.25% to avoid harming aggregate demand (which could have accelerated a recession).
In 2024, however, prices have been steadily falling in the UK. In January, inflation stood at 4% and steadily fell to 2% in May (which held for two months). This gave the Monetary Policy at the BoE greater confidence that prices were coming under control, justifying a decision to lower the base rate in September 2024.
Will interest rates fall even more?
The Monetary Policy Committee (MPC) is expected to next meet on 7 November 2024. Markets are widely expecting a further interest rate cut. There could even be an additional cut in December, especially if the Federal Reserve continues its aggressive loosening in monetary policy. Another key factor will be the UK’s rate of services inflation.
The UK is a primarily services-based economy (accounting for 80% of national output). Services inflation has been slower to fall in 2024 compared to the CPI measure. In January, it stood at 6.5% and has remained above 5% each month since (although it is falling). The BoE forecasts that services prices will fall in the second half of 2024.
If prices undercut its target, this could justify more aggressive base rate cuts in the coming months. In this scenario, the UK could finish the year with its base rate at 4.75% or 4.5%. However, this outcome is not guaranteed, and clients should refrain from making big financial planning decisions based on MPC predictions.
How does this all affect me?
Interest rates have a big impact on household wealth and finances. They affect savings and borrowing most directly. When interest rates rise, savings rates tend to also go up. Borrowing costs (e.g. mortgages and credit cards) also increase. The relationship is also true in reverse.
With the base rate potentially falling in 2024, households could benefit from falling borrowing costs. Those with variable or “tracker-based” mortgages might see their monthly payments decrease, putting more disposable income back in their pockets.
Businesses could also stabilise their financials by restructuring debts at lower rates. In turn, this might spur job growth as businesses face lower expenses. However, this outcome could be offset by other factors in 2024. For instance, if the Autumn Statement raises costs for employers (e.g. by removing the National Insurance exemption on employer pension contributions), then the government’s pro-growth agenda could be undermined.
Those with a fixed-term mortgage may want to explore their remortgage options, particularly if they took out the deal in 2022 or 2023 (when rates had risen considerably). Clients will need to consider the opportunity-cost calculation here carefully. Speaking with a financial adviser could bring some essential clarity. If you are nearing the end of a fixed-term mortgage, you may need to weigh the pros and cons of remortgaging now versus later (when rates may fall).
Those with savings (or those looking to save or invest) should also factor interest rates into their planning. The returns from variable and new fixed-rate accounts could deteriorate. This might justify a re-examination of your strategy. Depending on your own financial goals, situation and risk tolerance, it may be wise to move certain cash assets into investments – e.g. equities and/or bonds. Higher rates of return could be available elsewhere, helping investors to maximise their chances of matching and beating inflation. However, this should be managed carefully with a financial adviser to ensure you understand the risks and diversify properly.
Invitation
If you are interested in starting a conversation about your own financial plan or investments, then we’d love to hear from you.
Please contact us to arrange a free, no-commitment consultation with a member of our team here at Elmfield Financial Planning in Padiham, Burnley, Lancashire.
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T: 01282 772938
