Will interest rates come down again?

The Bank of England has not increased interest rates for two months and inflation has begun to slow, raising hopes that the cost of borrowing may have peaked.

Interest rates were held for the second consecutive month in November at 5.25%, while the latest Office for National Statistics data shows inflation fell from 6.7% to 4.6% between September and October.

The Bank of England said there are "signs of some impact of tighter monetary policy on the labour market and on momentum in the real economy" that show the current rate level is "restrictive" enough.

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Inflation is on a "downward trend" as the Bank of England aims to get it close to its 2% target, said The Times Money Mentor. Some economists had predicted the base rate would increase at least one more time in 2023, in a bid to bring down inflation further.

But as inflation falls, many analysts and economists are turning their attention to when interest rates will be cut. Expectations range from rates dropping to 4.25% by the end of next year and to 3% by late 2025, said This Is Money, while the boldest prediction, from Goldman Sachs, is that cuts could come as soon as February.

What has the bank said?

However, Bank of England governor Andrew Bailey warned the Treasury Select Committee this week that the markets are currently "underestimating" the "potential persistence" of inflation and its risks.

He also told a conference hosted by the Central Bank of Ireland in Dublin earlier this month that "it's really too early to be talking about cutting rates".

Earlier this year, the Bank warned that the cost of borrowing would remain high for at least two years. 

A "persistent barrier" to bringing down inflation is the "strong demand for workers, which is pushing wages higher", wrote The Guardian's Phillip Inman, and the "slow decline in food inflation" and "rise in the cost of services".

 How will savers and mortgage holders be affected? 

Falling inflation means some savings rates are now high enough to outweigh the cost of living measure's "eroding prowess", said Moneyfacts.

The average one-year fixed savings rate is currently 5.21%, according to Moneyfacts data. And many savings accounts "are still paying rates of interest not seen since before the financial crisis 16 years ago", said The Times Money Mentor.

There is also good news for homeowners, with major lenders cutting their mortgage pricing amid falling inflation and the freeze on the base rate. 

Hope has also been sparked for those reaching the end of fixed-rate mortgage deals, as brokers "expect more competition" among lenders soon as a result of the Bank's decision, said the BBC.

Around three-quarters of mortgage customers hold such deals. And according to banking trade body UK Finance, about 800,000 have fixed rates that are ending in the second half of 2023, with a further 1.6 million expiring next year.

What next?

The Bank's Monetary Policy Committee (MPC) will announce the next base rate decision on 14 December.

The Bank predicted in August that inflation would "continue to fall in 2024, and reach our 2% target by early 2025". If inflation continues to decrease at the rates seen in the last few months, this target may be reached. 

And "as soon as inflation is back under control", said The Times Money Mentor, "the Bank is likely to bring interest rates down".