INTEREST rates are widely expected to fall next month, experts are predicting.
The Bank of England sets its base rate roughly every six weeks, which has a knock-on effect on savers and homeowners.
When the base rate is lower, borrowing is cheaper so mortgage rates tend to come down too – but savers also get worse interest rates.
Earlier this month, the base rate was held at 4%.
But experts believe the Bank’s Monetary Policy Committee (MPC), which decides the base rate, will decide on a cut when it next meets on December 18.
This is because the Bank tends to lower interest rates when it believes inflation is falling towards its 2% target.
Inflation is currently at 3.8%, but the Bank thinks this figure has peaked and we’ll now start to see inflation come down.
Policymakers might also choose to make more rate cuts if there is poor economic growth, as this can help boost the economy by encouraging people to spend money.
Earlier this week, figures were released showing the economy grew just 0.1% in the third quarter of the year.
Raj Badiani, economics director at S&P Global Market Intelligence, told The i that the data “ramped up the probability of an interest rate cut” in December.
Jack Kennedy, senior economist at Indeed, also said the “door remains open” to a rate cut next month.
He pointed out that one of the factors that can increase inflation – wage growth – is easing gradually.
Meanwhile Caitlin Eastell, spokesperson for Moneyfactscompare.co.uk, said the chances of a cut have risen “significantly” if inflation has indeed peaked.
What you need to know about interest rates
Interest is what you pay for borrowing money and what banks pay you for saving money with them.
The Bank of England sets the core interest rate in the UK, also known as the base rate.
This is the rate of interest it pays to banks, building societies and financial institutions, as well as the rate it charges on loans to them.
That means that when the base rate changes, it will usually have an impact on the interest rates banks charge or offer.
So if the base rate rises, banks will often increase how much they charge customers on loans and mortgages – but they’ll also offer a higher interest rate on savings.
The idea is that when people are paying more on their mortgages and loans, they’ll have less to spend on other things.
That means businesses are less willing or able to raise their prices – and when prices don’t go up so quickly, inflation falls.
The reverse happens when interest rates go down.
If payments on mortgages and loans go down, people have more money to spend on other things and more cash can go into the economy.
What this means for your money
If you’re looking to get on the housing ladder, on a tracker mortgage, or needing to remortgage, you’ll potentially see mortgage rates come down.
Rates on fixed mortgages have already been reducing in recent weeks.
Big names including Barclays, HSBC and TSB have all announced small cuts.
This is partly because markets have already begun pricing in a rate cut in December.
But a base rate cut next month could cause mortgage rates to dip even lower as lenders compete against each other.
On the other side of the coin, savers could end up missing out if the base rate is cut.
They could see the interest rates on their savings go down – unless they’re already locked into an account with a fixed-term interest rate.
In this case, the interest rate will remain unchanged until the end of the agreed fixed term.
Some savers wanting to keep hold of higher interest rates may want to put their money into a fixed-term account now.
However you should be aware that interest rates can go up and down, and that you won’t be able to access your money until the account matures.
Moneyfacts’ Caitlin Eastell says: “Understandably, savers may not be thrilled by the news of a base rate cut, but any hesitation to lock in their rates now could mean they miss out in real terms.
“Although it typically impacts variable rates in the first instance, it wouldn’t be surprising if providers factored this into their pricing for fixed rates.
“The latest Bank of England Money and Credit stats revealed that £5.8billion was put into easy access accounts during September.
“This points to many savers adopting a ‘wait and see’ approach, and unwilling lock away their cash until after the Autumn Statement when more certainty is expected.
“However, depending on what changes, it’s not guaranteed that markets will react favourably, so it may be best to secure the market-leading rates now.”
