They’re the cost of borrowing or the reward for saving; if you have savings, a percentage of your savings will be paid back into your account. This percentage is calculated on a daily, monthly or annual basis, depending on the agreed terms.

Around every six weeks the Bank of England Monetary Policy Committee (MPC) meets to set the underlying Bank Rate, which influences other interest rates. 

These changes filter down to the commercial banks used by businesses and the public. These banks will usually alter interest rates on saving and borrowing to align with this rate, although only after considering their own costs of financing or balancing depositors and borrowers. 

At its September meeting the MPC voted to pause hiking rates for the first time in two years. “The decision to maintain Bank Rate at 5.25% was driven by a decrease in headline inflation, increasing signs of a cooling labour market, and a drag on momentum in the economy more generally,” Mark explains.

See below for a clearer picture of how Bank Rate has changed in the last few years alongside gross domestic product (GDP) economic growth, as well as the bank’s future predictions. 

Interest rates and GDP from 2017 to 2024

As the economic cycle turns, interest rates are likely to stabilise before being lowered. The graphic above shows how this can be cyclical and why it helps to keep an eye on market conditions and what’s forecast for upcoming years.  

“As the Bank Rate falls, commercial banks will look to reduce both the rates paid on deposits and those charged on lending,” Mark says. “Each bank will have its own appetite for funding based on its balance sheet make-up, the need to fund assets and available sources of funding.

“If you have a loan or a mortgage these interest payments could fall, but if you have savings you may be paid less interest,” says Mark.

In a falling rate environment, whilst businesses can benefit from higher rates for shorter term deposits, they might compare the benefits of locking in an interest rate longer term, noting the impact of central bank rates continuing to fall over a prolonged period.

Fixed rate: This pre-agreed interest rate is constant for either the entire life of the product or for a fixed term (time). Whether interest rates go up or down, your pre-agreed rate will remain the same.

Floating rate (also called an adjustable or variable rate): This changes according to the benchmark rate that it’s linked to, such as the Bank of England Bank Rate or the Sterling Overnight Indexed Rate (SONIA). This means it moves up or down depending on market conditions.

So a fixed rate loan taken out at the beginning of 2022 would be substantially lower than a similar product taken out now when the interest rate is at 5.25%. A variable rate loan would have risen during the last year but will start to fall once the Bank Rate begins to drop.

Equally a fixed rate offered on a deposits account in early 2022, when the Base Rate was around 0.5%, is likely to have been lower that at the current time, and would not have increased along with the Bank Rate. However, a variable savings rate would have usually risen during the last year, therefore earning higher interest.

As consumers have grappled with higher rates on their mortgages and borrowing over the past year, they will have less disposable income – which might also affect a business’s sales and revenue. Here are some tips which might help take advantage of higher rates:

• Revisit your business plan, supply chain and support for your business.
• Look at how our savings accounts could help strengthen your business finances and support you to reinvest in its future.
• Review any variable rate loans.
• Increasing cash reserves.

Market specialists forecast Bank Rate to peak at around 5.5% between now and the first quarter of 2024. “The Rate is then predicted to remain steady through to Q3 2024, when it may be cut to 5.25%. From then on, how fast rates are cut will depend on how quickly inflation slows coupled with the wider economic outlook,” Mark points out.

By December 2024, our specialists predict Bank Rate will be cut to 5%, with a further reduction to 4.75% by mid-2025. For more detailed insight on the UK economy, including regular updates on interest rate forecasts, take a look at our Monthly UK Economic Outlook. 

For further information on financial health, visit our Cost of Living hub.