Personal Investing  Open an account Free investor emails  Help & support Register for online access Log in

Investment accounts  Financial advice & support  Funds  Shares  Pensions & retirement  Markets & insights Search 

Home  Markets  UK

When will interest rates

fall?
Published 29 November 2023

Nafeesa Zaman
Fidelity International

Important information - the value of investments and the income from them, can go down
as well as up, so you may get back less than you invest. Latest articles

   
Investment trusts

Could Scottish
The Bank of England has left rates unchanged for the second month running. Markets are Mortgage be on the
now pricing in a peak in rates, with two cuts likely to come by the end of next year. brink of a turnaround?
However, the path to falling rates remains uncertain. Inflation continues to be a significant Two large potential IPOs could
problem in the UK. It fell to 4.6% in October, down from 6.7% in September but it's still more change sentiment
than double the Bank's 2% target.
Nick Sudbury
Investment writer
Fidelity investment director Tom Stevenson said that the Bank of England's challenge is 30 November 2023
arguably greater than the Federal Reserve, so "higher for longer" may be a theme for
many years to come.

Official Bank Rate

Podcast

6%
FTSE 100: will life begin
(again) at 40?
5%
What role should the FTSE 100 play
4% for investors?

Ed Monk
3%
Fidelity International
30 November 2023
2%

1%

0%
Jan '22 May '22 Sep '22 Jan '23 May '23 Sep '23
UK
Bank of England Base Rate
When will interest rates
fall?
Markets are wrong on interest rate
Source: Bank of England, December 2019 to November 2023.
cuts says OECD

Nafeesa Zaman
Fidelity International
How forward market interest rates have changed 29 November 2023

Forward market interest rate (19 September) Forward market interest rate (21 September)

Forward market interest rate (30 October) Forward market interest rate (2 November)

Forward market interest rate (16 November) Forward market interest rate (23 November)

5.75%

5.5%

5.25%

5%

4.75%

4.5%
Q3 2023 Q4 2023 Q1 2024 Q2 2024 Q3 2024 Q4 2024

Markets are wrong on interest rate cuts says OECD

The Organisation for Economic Co-operation and Development (OECD) has warned that
inflation could force central banks to keep interest rates higher next year.

According to the OECD’s latest economic outlook, the Bank of England is expected to hold
rates at their current peak until 2025 because of persistent inflationary pressures.

This outlook is far longer than financial markets are expecting. The latest forward market
interest rate (23 November) shows that the UK interest rate is expected to fall in quarter 2
of 2024.

In a bid to tackle inflation, the OECD encourages governments to “maintain restrictive

policy”, and “require additional interest rate increases in economies in which high core
inflation is proving persistent.”

It’s a sentiment that’s recently been echoed by the Bank of England. Just yesterday (28
November), Jonathan Haskel, an external member of the Bank’s Monetary Policy
Committee said there’ll be “higher rates for longer” to reduce inflation and meet its 2%
target.

BoE policymaker warns there's no scope to cut rates “anytime soon”

Jonathan Haskel, an external member of the Bank’s Monetary Policy Committee said that
borrowing costs will remain at or near their current level of 5.25% for an extended period
(28 November).

During a speech at the University of Warwick, Haskel said that it could take at least a year
for the labour to loosen to pre-pandemic figures.

He said that the “still-high degree of labour market tightness continues to impart
inflationary pressure. This will need higher rates for longer to get inflation sustainably to
target. This is why I have been voting for higher rates at recent meetings.”

Haskel is not alone in his hawkish approach. There has been a string of comments from
Bank of England officials including Bank governor Andrew Bailey and chief economist, Huw
Pill.

UK shop price inflation falls to lowest rate in over a year

UK shop inflation fell to its lowest rate in over a year in November, according to the latest
British Retail Consortium (BRC) shop price index (28 November).

In November, annual shop inflation fell to 4.3%, down from 5.2% in October, marking its
sixth consecutive monthly decline and the lowest rate since June last year.

The BRC shop price index will provide an early indication of pricing pressures ahead of
official data on December 20.

The Bank of England will continue to monitor economic data releases ahead of the next UK
interest announcement on 14 December 2023.

Bank of England chief economist sets the record straight

The Bank of England chief economist Huw Pill told the Financial Times that the central bank
can't afford to ease off tight monetary policy, even if it sees signs of weakening economic
activity (24 November).

Pill said that UK monetary policy was in a "difficult phase" and warned of "stubbornly high"
price pressures in the UK economy, following challenges like the pandemic and surging
energy costs.

The chief economist's stance comes at odds with comments he made in early November,
where he suggested that it was reasonable for markets to start cutting rates by mid-2024.

It caused tension at the Bank as it didn't match up with Bank of England governor Andrew
Bailey's tone, who has reiterated time and time again that it is "too early" to discuss interest
rate cuts.

Latest interest rate forecasts rise signalling “higher for longer” environment

Following the Autumn Statement (22 November) and a string of economic data
releases, the latest implied market forward rates rose.

According to the latest data from Bloomberg (23 November), UK interest rates are forecast
to remain at 5.20 until quarter 2 of 2024. Only until mid-2024 will rates begin to fall.

It’s quite a stark difference to the previous forecast on 16 November where rates were
expected to fall this year. It only reemphasises the “higher for longer” interest rate
environment that we’re living in.

The Bank of England governor Andrew Bailey remains hawkish. That’s because inflation
continues to be sticky. At 4.6%, it’s still more than double the Bank’s target rate of 2%.

And while Prime Minister Rishi Sunak met his goal of halving inflation this year, growth is
another issue in the UK.

Recent economic data releases have painted a bleak picture. In early November, the UK
economy stagnated in the three months to September. UK retail sales figures fell to their
lowest levels since February 2021.

Although there is some glimmer of hope. Today (24 November) UK consumer confidence
rose sharply. That's good news for retailers at this critical festive season.

The Bank of England will continue to keep a sharp eye on economic data to assess if
monetary tightening is working.

The UK 10 year gilt yield fell to 4% following the Autumn Statement. Since then, the yield
steadily climbed up, reaching a peak of 4.3%.

A snapshot of current UK data releases

UK shop inflation fell to its lowest rate in over a year in November, according to the
latest British Retail Consortium (BRC) shop price index (28 November).

The Office for National Statistics (ONS) published data on government borrowing. In
October, the UK government borrowed £14.9bn, surpassing analyst expectations (21
November).

Last week, UK retail sales figures fell to their lowest levels since February 2021. Retail
sales volumes are estimated to have fallen by 0.3% in October 2023 (17 November).

Earlier this month, the latest gross domestic product (GDP) figures revealed a gloomy
picture. According to the ONS, the UK economy stagnated in the three months to
September.

Currently, UK inflation stands at 4.6%, down from 6.7% in September.

What is Fidelity’s view?

The latest data from the Office for National Statistics (ONS), (15 November) showed a
steeper than expected dip in the headline inflation rate to 4.6% in October, down from 6.7%
in September.

According to the ONS, the largest contribution to the monthly change in Consumer Prices
Index (CPI) and Consumer Prices Index including occupiers’ housing costs (CPIH) came
from housing, household services, food, and non-alcoholic beverages.

Although households may breathe a sigh of relief, there’s no doubt they’ll continue to feel
extreme pressure on their finances as consumer prices are still 21% higher compared to
January 2021.

Still, it’s not all bleak news. Tom Stevenson, investment director for Personal Investing at
Fidelity International said inflation is finally responding to two years of tighter monetary
policy.

“The latest CPI reading of 4.6% allows the Prime Minister, Rishi Sunak, to claim that he has
met his self-imposed target of halving inflation during 2023, although prices continue to rise
faster in the UK than in comparable developed economies,” said Tom.

“The UK economy is clearly slowing as intended. The challenge remains to bring wages
back into line with the broader economy’s sluggish growth prospects.”

“This week’s employment data showed incomes are now growing faster than prices. This is
a positive for the economy but makes it harder for the Bank of England to bring overall
inflation back to its 2% target. It suggests interest rates may need to stay higher for longer
to finish the job.”

“A controlled inflation rate makes the case for cash harder to challenge. Money market
funds are finally providing investors with a return that keeps pace with inflation. However,
historically, cash has failed to deliver a meaningful ‘real’ return over and above the rise in
prices, so investors looking beyond the very short term should still look to tap into the better
long-term returns provided by shares, bonds, and property.”

“Cash has an important role to play in a diversified portfolio, providing a cushion against
volatility and dry powder for timely re-investment in the market, but holding it over longer
periods has a significant opportunity cost.”

How do rising and falling rates affect investments?

There are many ways that rate movements affect investments. Most people will be all-too
familiar with the impact it can have on residential property prices, for instance.

But it can be nuanced. Consider the impact the recent rises had on growth and value
stocks. Growth stocks, which had flourished in the era of low rates, faltered.

Companies that are growth focused are often more sensitive to interest rates compared to
value stocks.

For example, Apple  is a very growth focused company. This is because the value of
Apple’s shares is determined by the value of all its future cash flows, discounted back to a
present-day value.

And because of the way investors value future growth, companies which are expected to
have a lot of growth in the future are more sensitive to rate rises.

That’s why last year, when rates rose, growth stocks fell out of favour. Similarly, when rates
fall, growth stocks become popular with investors.

It’s a different story for value stocks. For example, BP , will continue to generate profit
and churn out dividends even if it’s in a high interest rate environment. That’s because its
value is derived from the profits it makes today and its dividend-paying capacity.

Another example is the impact on money market funds. High rates have improved the rates
of return on these funds, which are considered to be low risk. From the Select 50, the Legal
and General Cash Trust is currently yielding 5.3%, for instance.

How rising and falling rates affect and mortgages and mortgage pricing?

Standard variable rate (SVR) mortgages and existing trackers tend to follow the Bank Rate,
but the pricing of new deals is more complicated.

Banks and building societies lend money from deposits taken from customers but also from
money they borrow on money markets.

Fixed mortgage deals are influenced by “swap rates”, be it two-year, three-year or five-year
pricing, while variable rate deals, such as trackers are more closely aligned to changes in
the yields on gilts, UK government debt bonds.

Since swap rates are based on what the markets think interest rates will be, if they rise,
then mortgage lenders will increase their pricing to maintain their profit margin. If they rise
too rapidly - mortgage lenders may have to pause lending or withdraw products until
pricing stabilises.

Ashray Ohri, a lead on macro research at Fidelity, said that mortgage rates are inherently
linked to the risk-free overnight indexed swap (OIS) rates, which reflect the expectations for
the path of Bank rate in the future.

These changes steadily filter through to changes in mortgage pricing. A fall in swap rates
in often followed by a fall in the rates being offered on new fixed mortgage deals,
although this is never guaranteed given the many factors at play.

We hope to provide more information on swap pricing so please bookmark this page and
watch out for updates.

UK mortgage borrowers’ sensitivity to rates

The UK central bank is particularly mindful of the impact rate changes have on UK
consumers.

Some markets, such as the US and Denmark, traditionally have mortgage rate terms of 20
to 30 years. In Britain, Canada and much of Southern Europe, short-term deals pervade.

It means that in the UK, most homeowners are currently on a fixed-rate mortgage, making it
the most common type of mortgage. The Bank of England is acutely aware that millions of
people will see these arrangements, some fixed at rates below 1%, coming to an end in
the coming years, with those borrowers compelled to take far higher rates. As of
24 November, the average two-year mortgage today is 4.87% and the average five-year
mortgage today is 4.59%.1

Prior to the latest interest rate announcement (30 October), UK mortgage approvals
slumped, with remortgaging at its lowest level since 1999.2

Figures from the Bank showed net borrowing of mortgage debt decreased from £1.1bn in
August, to a net repayment of £900m in September, the lowest level since April this year.

A peak in savings rates?

Savings rates, of course, are also part of this maelstrom of market pricing. The change in
forward market pricing may put pressure on banks to withdraw some of the best buys on
offer. Although again, these markets are volatile, and nothing is certain. Given inflation has
fallen, saving rates now exceed inflation, now at 4.6%. The best return savers can currently
get on easy-access cash accounts is 5.22%3 although higher rates are available if you tie
money up for periods.

The best fixed-term savings account offers 5.8% if you lock in for a one-year fix.

And finally… annuity rates

Aside from increased savings rates, another silver lining of the recent surge in Bank Rate
has been improved annuity rates. With annuities, you hand over a lump sum and received
an income, often inflation-linked, for the rest of your life. These rates were appalling low in
the era of low rates but have enjoyed a renaissance. Annuity pricing is influenced by the
yields on gilts. The 10-year gilt yield hit a high above 4.5% in early September and has
since fallen to around 4.1% (28 November).

If you sign up to our Pulse alerts, you'll be the first to know when forecasts move.

Sources:
1 The Times, 28 November 2023 
2 The Guardian, 30 October 2023 
3 Money Saving Expert, 28 November 2023 

Important information - investors should note that the views expressed may no longer be
current and may have already been acted upon. Overseas investments will be affected by
movements in currency exchange rates. Reference to specific securities should not be
construed as a recommendation to buy or sell these securities and is included for the
purposes of illustration only. This information is not a personal recommendation for any
particular investment. If you are unsure about the suitability of an investment you should
speak to one of Fidelity’s advisers or an authorised financial adviser of your choice.

Volatility UK Interest rates

Share this article

   

What you could do next

Understand the Stay up to date with Talk to our advisers

investment landscape market data
Our team of advisers can help you
Watch Tom Stevenson's analysis of Get the latest share prices, market achieve your investment goals,
the global markets and key asset data, news, factsheets and whether those relate to one-off events
classes for the next 12 months. performance charts for FTSE or more complex needs with ongoing
companies. support.

Watch Investment Outlook View market data Talk to us

Important policies Useful information Other Fidelity sites

Conflicts of interest statement About Fidelity International Fidelity global sites 

Remuneration policy Consumer Duty Target Market  Fidelity Careers 

Whistleblowing policy Consumer Duty Value Assessment Statement  Workplace Pensions 

Security Investing in Fidelity funds Press and media 

Privacy statement Preference centre

Legal information Statutory and Regulatory disclosures

Accessibility Help & support

Cookie policy Bereavement

Complaints procedure Forms

Mutual respect policy Contact us

Doing Business with Fidelity  Affiliates

Modern slavery Helping vulnerable customers

Diversity and Inclusion

Fidelity gender pay report 

Please remember that past performance is not necessarily a guide to future performance, the performance of investments is not guaranteed, and the
value of your investments can go down as well as up, so you may get back less than you invest. When investments have particular tax features, these will
depend on your personal circumstances and tax rules may change in the future. This website does not contain any personal recommendations for a
particular course of action, service or product. You should regularly review your investment objectives and choices and, if you are unsure whether an
investment is suitable for you, you should contact an authorised financial adviser. Before opening an account, please read the ‘Doing Business with
Fidelity’ document which incorporates our client terms. Prior to investing into a fund, please read the relevant key information document which contains
important information about the fund.

This website is issued by Financial Administration Services Limited, which is authorised and regulated by the Financial Conduct Authority (FCA)  (FCA
Register number 122169) and registered in England and Wales under company number 1629709 whose registered address is Beech Gate, Millfield Lane,
Lower Kingswood, Tadworth, Surrey, KT20 6RP.

Don't miss out on our experts' free Submit


© FIL Limited 2023 Enter email to start receiving The Pulse
   
market insights - three times a week