What could happen to interest and inflation rates in 2024?

14th December 2023

Over the course of 2023, inflation and interest rates in the UK have shifted once again.

The effects of the Covid-19 pandemic, the war in Ukraine, and other economic factors sent inflation to a peak of 11.1% in October 2022, the Office for National Statistics (ONS) reports. In an attempt to bring inflation down, the Bank of England (BoE) increased its base interest rate – with some success.

Indeed, as of October 2023, UK inflation stands at 4.6%, above the BoE’s 2% target but far below last year’s highs. Meanwhile, the base rate has remained at 5.25% since August, and many private lenders have followed suit and raised borrowing rates above 5% too.

Inflation and interest rates both affect personal finance, and as the year ends, you may be wondering: “What’s going to happen to these two economic factors in 2024?”

Keep reading to find out what has contributed to the shift in inflation and interest rates this year, and what could be in store in the year to come.


First, let’s take a look at inflation.

Inflation has more than halved in 2023, and could continue to decline in 2024

As you read in the introduction, inflation has declined significantly in 2023. By the end of December 2022, the rate stood at 10.5%; by October 2023, it was just 4.6%.

One cause of declining inflation is the BoE base rate, raised 14 times since December 2021, bringing it from 0.1% to 5.25%. In theory, raising interest rates helps to curb inflation by lowering consumers’ disposable income, forcing prices down.

If the BoE chooses to fix the base rate above 5% for the foreseeable future, this could continue to have the desired effect on the rate of inflation.

However, as we explore below, the impact of inflation on your finances is more complicated than it appears on the surface.

Whilst the overall rate of inflation has decreased, everyday costs may still be higher

The rate of inflation is measured by looking at a “basket” of more than 700 goods and services across the UK. That means that the figure you see – currently 4.6% – is an average not pertaining to any specific sector or product.

When we break this down a little further, though, it’s clear that some costs are still far higher than others.

As the Guardian reports, the recent drop in inflation can be largely attributed to falling energy prices. The report states, “At the heart of October’s decline in inflation was the 23% year-on-year cut in the energy price cap for the typical annual gas and electricity bill, from £2,500 last October to £1,923 the same month this year.”

Outside the energy sector, though, prices are still disproportionately high in some areas. For instance, Statista reports that food and drink inflation was 10.5% in October 2023, down from a high of 19.1% in March.

Plus, as the ONS reports, motor fuel prices rose between September and October 2023 (whilst falling year-on-year), signalling that the price of fuelling your car is not coming down smoothly either.

With all this to consider, it’s important to remember that whilst a fall in inflation is a positive sign, day-to-day costs may still remain higher than the overall inflation rate indicates.

As we enter a new year, keeping this in mind could help you form realistic expectations of costs in 2024 – even if inflation keeps falling as we hope it will.

Interest rates

Now, let’s look at what has brought interest rates to where they are today, what could happen in 2024, and how these changes could affect your finances.

The BoE base rate was unusually low between 2008 and 2021

Although it may feel as if interest rates have suddenly become extremely high, it’s important to remember that in the years between 2008 and 2021, the base rate was actually unusually low.

After the financial crisis of 2008, the BoE kept the base rate under 1% to encourage borrowing after significant volatility caused widespread panic. Then came the Covid-19 pandemic, which prompted the BoE to lower the base rate to just 0.1%.

These low rates were adopted by most lenders over this 13-year period, meaning that individuals could take out mortgages and other loans relatively cheaply. In short, low interest rates became the “new normal”.

So, now that the base rate has been increased fairly quickly to 5.25%, borrowers are suddenly facing a return to the “old normal”, and many may be concerned about affording this rise.

The base rate, and the rates of private lenders, are unlikely to decline sharply in 2024

Whilst inflation is still above target, the BoE may not suddenly bring the base rate down. In fact, if inflation remains sticky at around 4%, the Bank could even hike the base rate again.

And, if inflation does come down as it is hoped to, the BoE may not then reduce the base rate to its previous low levels – in fact, this is extremely unlikely to happen.

On the other hand, many forecasters believe that the BoE’s current base rate is unsustainable for UK mortgage holders and those with other forms of debt. If consumer spending slows too much, the UK could enter a recession, which it has narrowly avoided so far.

So, it could be that the BoE begins to ease the base rate only once inflation is under control. This could happen by the end of 2024.

However, it’s important to remember that unless there were another event similar to Covid-19, the BoE may see no reason to lower the base rate under 1%, but could maintain it at around 4% over the long term.

Anticipating higher-for-longer interest rates could make you more prepared for 2024

Although there is no crystal ball that tells us what will happen next year, preparing for higher-for-longer interest rates could put you in good stead for 2024.

If you’re remortgaging your home, buying a new property with a mortgage, or taking out a business loan, these debts could have higher interest rates attached to them than any loans you took out between 2008 and 2021.

Get in touch to discuss how inflation and interest rates could affect your money next year

We understand that the UK’s ever-changing financial landscape can become stressful to handle at times. That’s why our team of Financial Planners will always put your goals first, and are here to listen to any questions or concerns you may have about the year ahead.

To discuss how interest or inflation rates could affect your wealth, email us at enquiries@pen-life.co.uk, or call 01904 661140.

Please note

This blog is for general information only and does not constitute advice. The information is aimed at retail clients only. All information is correct at the time of writing and is subject to change in the future.

 Your home may be repossessed if you do not keep up repayments on a mortgage or other loans secured on it.

Buy-to-let (pure) and commercial mortgages are not regulated by the FCA.

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Category: Investment