What is going to happen to interest rates in the second half of 2023?

The one question we get asked more than most, is what do we expect interest rates to do for the remainder of this year? Now we don’t have a crystal ball to tell us what interest rates will be come Christmas time, but there are many indicators that we can use to calculate the future of interest rates for the coming 6 months. 

 

We will show you the indicators that the finance sector use to determine the upcoming changes to interest rates and the stimulus that the Bank of England look out for when making a decision to change interest rates. 

 

The main driver of interest rates is inflation, one of the few actions the Bank of England and the government can take is to increase or reduce interest rates in an attempt to manipulate inflation. Inflation is the rising cost of goods and services, the cheaper a good or service and the easier it is acquiring that good or service the more expensive they become – that’s inflation. The Bank of England will increase interest rates to reduce the amount of money people spend in the economy by making it more expensive to obtain credit. If people have less money to spend, they won’t be buying as many goods and services which in turn drives down the cost of them. This works the other way too, if the government and Bank of England need to increase the amount of money circulating in the economy, or to drive money into a certain sector they will reduce the cost of borrowing by reducing interest rates. 

 

Given that as of today inflation sits around 10%, and the Bank of England’s annual target is 2% each year, we can expect the Bank of England to take further action until we reach their target. Until inflation is managed then we can expect further rate rises until the required effect is met. With gas and electric, fuel and food prices slowing the 4 base rate changes already implemented by the Bank of England since September 2022 are slowly having the desired effect, but prices are still not as low the Bank of England target. 

 

House prices and property transactions are another key indicator as to whether the Bank of England will change interest rates. Just like with inflation they will stimulate growth or a slowing of prices and transactions by making it easier or more difficult to enter the property market. If the government want more people to buy property, they will reduce interest rates or reduce taxes in this sector. A prime example of this is in 2020 during the global pandemic the UK government abolished stamp duty for all property purchases up to £500,000. This, plus the reduction of the Bank of England base rate to 0.1% caused a ‘Boom’ in house prices and the number of transactions. During this period the UK average house price rose 10% per year, year on year for 2 years. 

 

Stamp duty changes in 2023 are helping support buyer demand amidst pessimism from the media about house prices and transactions. The number of property transactions we are seeing in 2023 have returned to pre covid levels, which when you take 2020-22 out of the average figures paints a more accurate picture and would indicate that the market is ticking over as normal. The market looks destined for a crash if you compare the transactions figures from this year and the sales figures of 2021/22 as those years were an anomaly as we experienced an abnormal surge of people moving house or increasing the value of their current properties by making the most of historically low interest rates and the stamp duty break. Just like with lower interest rates, reducing stamp duty reduces the barrier to entry when it comes to buying your next home. If you can save £10,000+ on the purchase of your dream home this makes buying that dream home easier and also more attractive. 2023 sees a reduction (not abolition like 2020) to stamp duty land tax, this was implemented to support property purchases and therefore house prices when interest rates and the general cost of living continued to rise. 

 

We can use the pattern of the last 2 rate rises out of the 4 since September 2022 to predict the next rate changes. The last 2 rate changes have been less severe than the 2 before them. As you can see below from the changes in the base rate since September 2022 the jump in base rate has diminished over time that the jump from rate change to rate change is getting smaller: 

 

September 2022 – 2.25% base rate 

November 2022 – 3% base rate (+1.0%) 

December 2022 – 3.5% base rate (+0.5%) 

February 2023 – 4.0% base rate (+0.5%) 

March 2023 – 4.25% base rate (0.25%) 

May 2023 – 4.25% base rate (0.25%) 

 

Historic patterns do not guarantee future performance but do help to give us an idea of what the Bank of England’s next move will be. If the rate rises are getting smaller each time, as the previous rate rise has the desired effect on inflation, we can expect the next rate rise to be small as well. 

 

When you take all the above into account - inflation is still too high, house prices are stable, buyer demand is still strong, stamp duty is lower than normal we can expect the Bank of England to increase the base rate again before Christmas but to only make a small increase. Our estimate is that this increase will follow the last rate rise and will be another 0.25% increase.