When will interest rates fall? The Governor of the Bank of England explains what the future holds

The Bank of England met again this week to discuss what it needs to do to tackle inflation. It spent 2022 and most of 2023 raising interest rates after spikes in energy and food prices sent inflation soaring.

But since last September, the Bank’s policy makers have kept interest rates fixed at 5.25%, a decision they stuck to this week. Here, the PA news agency looks at what the decision means, whether rates will fall soon and what the Bank expects to happen to the economy.

What happened to interest rates on Thursday?

The Bank of England’s monetary policy committee kept the key interest rate at 5.25% at its May meeting. It is the sixth time it has kept rates unchanged since it stopped voting to raise rates in September. The rate has previously risen 14 times in a row since the end of 2021, taking it from 0.1% to the highest level since the 2008 financial crisis.

What will the decision to keep interest rates mean?

The base rate dictates how much the Bank of England charges commercial banks to lend money, which influences what those banks charge customers for mortgages and loans. Rate hikes in recent years have left mortgage rates much higher than normal for most of the past decade.

Interest rates remaining high means mortgage holders are not yet off the hook, with both variable rate mortgages and new fixed rate mortgage deals remaining expensive. Around 1.6 million deals are set to expire in 2024, according to banking trade body UK Finance.

What about inflation?

Moving interest rates up and down is the central bank’s main way of controlling inflation – the rate at which prices rise over time. Inflation eased to 3.2% in March, down from a peak of 11.1% in October 2022, but still above the Bank’s target of 2%.

The Governor of the Bank, Andrew Bailey, said on Thursday that he needed to see “more evidence that inflation will remain low before we can cut interest rates”.

Will rates continue to stay the same or could they go up or down?

The Bank’s monetary policy committee, which makes rate decisions, is due to meet three more times between now and September. Mr Bailey did not rule out a rate cut at the next meeting in June, stressing that future economic data will be key to a decision.

He said: “To be clear, a Bank Rate change in June is neither out of the question nor a foregone conclusion.”

In this context, a “fait accompli” means something that is set in stone. In short, Mr. Bailey refused to engage in any way.

What about the Government?

Some politicians have tried to pressure the Bank to cut interest rates in recent months, as it would be another signal that inflation is falling. With elections due later this year, this would be useful for the Conservatives, who want to show voters that the economy is doing well.

But Mr Bailey said on Thursday: “We are an independent central bank … When we sit in a room as the Monetary Policy Committee, we never discuss policy … It is not a consideration of that.”

So the economy is doing well?

Mortgage rates are still high – but if inflation continues to fall, that would be a small positive for consumers, as it means the prices of everyday shopping items are rising less quickly than before.

The Bank’s latest economic report also indicated that gross domestic product will grow more than previously estimated over the next two years, driven in part by population growth.

It’s still a complicated picture – but Mr Bailey said he was “optimistic that things are moving in the right direction” with the economy.