Have interest rates peaked?

Hopes are growing that the cost of borrowing may have peaked after the Bank of England held interest rates in October for the second consecutive month.

The base rate had risen 14 times in a row since December 2021, from 0.1% to a 15-year high of 5.25%. The hikes have left worried borrowers increasingly grappling with the question of when interest rates will reach their peak. 

The recent pause in increases will bring "relief to homeowners who have seen mortgage rates rise", said the BBC , but is "potentially the end of better news for savers". 

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However, with inflation still at more than three times the Bank's target of 2%, it is by no means certain if rates will stay where they are or even rise again. 

What are interest rates?

The interest rate, or the base rate, is set by the Bank of England’s Monetary Policy Committee. It is important because it influences the pricing of products offered by other banks and building societies. An increase in the base rate means that most mortgages, loans and savings rates will probably go up too. 

Interest rates are also used to control inflation or the prices of everyday items, the financial website added, with "the goal" to keep inflation as close to 2% as possible. 

Raising interest rates, explained The Times Money Mentor, should "in theory" encourage people to spend less, save more and push down demand, which should lead to lower prices. 

Will interest rates drop?

The latest pause in interest rate rises has raised hopes that the Bank of England's battle with inflation has "entered a new phase", said Hargreaves Lansdown. 

Much will depend on how fast inflation falls, "with wage growth and unemployment also holding some sway", added This is Money. However, expectations of where the base rate will peak have "fallen from a high of 6.5% in the summer to 5.25% in recent weeks".

Traders are already betting that rates have now peaked, said The Standard, as the Bank’s "bitter medicine" is continuing to slow down demand in the economy. 

However, this does not mean rates will necessarily going down soon, with inflation recorded at 6.7% in September, more than three times the target. Rather than further rises, this could mean rates remain higher for longer. 

Interest rates aren’t expected to fall until "at least the middle of 2024", the i news site added. This would coincide with "unemployment having reached its peak at 4.9% and inflation falling below 4% in March next year", Kay Neufield, from the Centre for Economics and Business Research, told the site. 

Tensions in the Middle East also risk pushing up oil prices, which could "threaten to reignite inflation" and push up energy bills, said Capital Economics’ Roger Bootle in The Daily Telegraph. This could "delay the fall in interest rates" or even cause them to rise further.