Last year, the Bank of England aggressively raised interest rates in an effort to tame inflation once and for all.
Homeowners whose cheap fixed term mortgage deals came to an end were hit hard by dramatically higher monthly rates – amplifying the impact of the cost of living crisis.
Yet at the same time, for those lucky enough to have a rainy day fund, rising savings rates provided a boost.
So what can you expect in 2024? Telegraph Money takes a look at the predictions for interest rates, mortgages and savings.
How much will interest rates fall?
The Bank Rate is the key interest rate in the UK and it influences many other interest rates in the economy, including the lending and savings rates offered by high street banks and building societies. Raising interest rates is the best way the Bank of England has to make sure inflation comes down and stays low.
The Bank Rate is currently set at 5.25pc. Markets are expecting interest rates to fall to 5pc by May, 4.75pc in June, 4.5pc in August and 4pc in November.
The Bank of England is widely predicted to cut rates sooner after data released at the end of 2023 showed slowing pay growth and a larger fall in inflation than predicted.
Inflation fell from 4.6pc to 3.9pc in November, pushed down by cheaper petrol, according to data released by the Office for National Statistics on December 20.
Earlier last month official data showed wage growth slowing to 7.3pc in the three months to October, down from 7.8pc.
The fall was the sharpest in two years, with the figure coming in lower than economists’ expectations of 7.4pc.
Economists polled by Reuters had been anticipating a figure of 4.4pc.
However, wage growth still remains about twice as high as what would be consistent with the Bank of England’s inflation target of 2pc, according to forecasters EY ITEM Club.
Oxford Economics, a research consultancy, updated its projections on January 8, forecasting a 0.5 percentage point drop in the Bank Rate to 4.75pc in the second quarter of this year, before slipping to 4.5pc in the third quarter and 4.25pc in the final quarter.
In 2025 it is expecting interest rates to fall to 4pc, gradually coming down by 0.25 percentage points each quarter to hit 3.25pc by the end of 2025.
Capital Economics, another research consultancy, expects the Bank Rate to fall to 5pc in June, 4.75pc in August and 4.5pc in September.
In December it expects another cut to 4pc. Next year the Bank Rate is forecast to drop to 3.75pc in February, 3.5pc in March, 3.25pc in May and 3pc in June – where it will remain until the end of 2025.
Pantheon Macroeconomics, which published its latest forecasts in December, also believes rates will have their first cut to 5pc in the second quarter of this year.
However, its economists are predicting the most modest falls in the Bank Rate, to 4.75pc in the third quarter of this year and 4.5pc by the end of the year.
The Office for Budget Responsibility, the official forecaster, was more cautious in its last forecasts but these were published in November and are less up to date.
It expects the Bank Rate to be around 5pc in July but has only projected a fall to around 4.75pc in the first quarter of 2025.
This is predicted to drop to 4.5pc around the second quarter of 2025, where it will remain throughout the rest of the year.
According to the OBR it is only in the first quarter of 2026 that the Bank Rate will slip to 4.25pc.
What’s next for mortgage rates?
Fixed mortgage rates have been plunging as lenders adjust deals to reflect falling swap rates, which are based on market expectations for interest rates and determine banks’ borrowing costs.
2024 started out with a bang as major lenders including HSBC, Barclays and Santander announced fresh cuts to their fixed-rate deals.
The lowest two-year fixed mortgage has dropped to 4.17pc (as of January 10), while the lowest five-year fix is at 3.89pc, according to Moneyfacts, an analyst.
Two-year fixed mortgage rates are expected to fall from 5.03pc on average to 4.47pc in February, according to Capital Economics. They are forecast to fall below 4pc on average in September and end the year at 3.68pc. Two and five year fixes are expected to stabilise at 3.31pc and 3.6pc in June 2025 respectively.
Five-year fixes are in for a bumpier ride: they are expected to slip to 4.06pc this month but rise again slightly next month to 4.12pc. In August they will be around 4.18pc, dropping to 4.03pc in October and 3.88pc in December.
Andrew Wishart, senior economist at Capital Economics, says mortgage rates will be lower this year than previously forecast.
As a result, he says house prices are expected to see a boost of 3pc in 2024, defying previous expectations of decline.
Nicholas Mendes, of broker John Charcol, says he expects to see more deals below 4pc between now and the middle of the year.
In the second half of this year, he expects to see five year fixes below 3.5pc and maybe some two-year fixes below 4pc.
“Will we see a sub-3pc fix this year? That’s slightly too early to call. There’s still so much that will have an impact on that: inflation, employment data, bank rate movement.”
Even though lenders are repricing fixed mortgage rates downwards, he warns that there will be limits to how much further they can go.
Swap rates have been rising over the past few days as markets reacted to stronger than expected employment figures in the US, which could lead to some lenders pulling their deals. Generation Home launched the first five-year fixed deal below 4pc in December but has since revised the rate upwards.
“Some of the lenders that repriced in the last week will probably reprice again slightly upwards marginally,” Mr Mendes says.
He says Barclays’ newly announced rate of 4.17pc is above swap rates which were around 4.2pc on the same day.
“They’re actually pricing below swap rates, which is very much unheard of,” he says. “The only thing which this would point to is that lenders are so keen to soak up as much business as possible and make up for volumes rather than profit and then hope that in two years’ time, when it comes to retaining those clients that they stay with Barclays, and that’s where they make their margins. So the fact is, we’re seeing lenders being really competitive in a way that they haven’t done for a long time.”
He says two-year fixed deals are currently looking like they offer the lowest cost option for most borrowers. Five-year fixes are the cheapest on the market but many borrowers do not want to commit to the rates in case there are steeper falls up ahead.
The cheapest tracker rate is 5.39pc, making it the more expensive option in the short term.
“Fixed rate prices have come down to a point where those that are on a tracker should seriously consider switching over,” Mendes says.
Adrian Anderson, of broker Anderson Harris, says he expects fixed rates to keep falling throughout 2024 but warns: “I wouldn’t be surprised if there’s a few bumps in the road,” he says. “It’s not necessarily going to be a straight line down, because the markets are so reactive to financial news.”
He says some mortgage borrowers have been biding their time on tracker rates and are now wondering whether this is the time to come off them to snag lower fixed rates.
What next for savings rates?
Fixed savings rates are similarly affected by market expectations for interest rates and have been coming down.
The highest-paying one-year rate has tumbled from a high of 6.2pc in October to 5.3pc, according to Savings Champion.
Anna Bowes, of Savings Champion, says: “If you’re thinking of fixing to be honest, you need to get going now.”
Easy access savings accounts pay nearly the same, with the highest-paying rate at 5.22pc, but savers are likely to earn more if they grab a fixed deal before interest rates drop.
Four and five-year fixed deals pay less (the best buys are at 4.55pc) but Ms Bowes says once inflation comes down to 2pc these still represent some very attractive long-term returns.
