Interest rates have been a focal point of the news over the last 18 months or so, as the UK’s central bank, the Bank of England (BoE), has increased its base rate many times in an attempt to curb surging inflation.

Eight times a year, the BoE’s Monetary Policy Committee (MPC) meets to decide on whether the base rate is at the correct level to maintain the Bank’s annual inflation target of 2%.

We’ve already seen two increases to the base rate in 2023, reaching 4.25% in March 2023 – the highest it has been since 2008.

So, where might interest rates be poised to go for the rest of the year? Find out how the base rate works, and where interest rates could be headed in 2023.

The base rate influences interest rates across the economy

The primary reason the base rate has been so newsworthy this year is because it’s one of the main tools the BoE has in combatting surging inflation.

Inflation reached highs not seen in 40 years in 2022, sitting in double figures throughout much of the year – indeed, the Office for National Statistics (ONS) recorded the peak to be 11.1% in the 12 months to October 2022.

As this is well above the Bank’s 2% target, the MPC elected to increase interest rates throughout 2022, raising them eight times consecutively.

The reason the base rate affects inflation is that it essentially sets interest rates across the economy. The BoE’s base rate is the interest rate that commercial banks and financial institutions receive when they hold money with the central bank.

These commercial entities generally then set their own rates that they offer consumers off the back of it.

This affects the rates of interest you receive on your savings, but also on what you pay when borrowing money, including mortgages, personal loans, and credit cards.

When inflation is on the rise, the BoE often raises the base rate to increase the interest paid to commercial institutions when holding money with the central bank. This incentivises them to hold money, rather than lend it, and discourages them from borrowing money at higher rates.

For consumers, this typically sees interest rates on savings increase, encouraging them to save their money rather than spend it. It also increases the rates of borrowing, meaning consumers often end up paying more on debts such as mortgages and credit cards.

Ultimately, the goal here is to slow the movement of money in the economy, bringing inflation back down to the BoE’s target level of 2% a year.

However, as the inflation rate still far exceeds the Bank’s target – the Office for National Statistics (ONS) report it was 10.4% in the year to February 2023 – where interest rates could go in the remainder of the year is still a topic of discussion.

Predictions for the base rate peak have been downgraded

Initially, experts were largely of the view that rates were to increase further in 2023. As MoneyWeek reports, some analysts had made predictions of rates reaching 5.7% by spring, climbing to 6% in summer.

However, commentators have subsequently softened their expectations for the year. Now, most experts are forecasting a peak of 4.5%.

This is potentially good news for many UK households as, while it might mean rates on savings accounts remain where they are for now, it could signal that borrowing rates for mortgages and other loans will stop rising.

Members of the MPC are against raising rates again

Interestingly, while some analysts have revised their predictions from earlier this year, one member of the MPC has been on record to say that they don’t think the Bank should increase rates again.

According to Professional Adviser, MPC member Swati Dhingra said that more rate increases could be negative over the medium term, citing concerns over denting output and deepening the financial impact on UK households.

“Overtightening poses a more material risk at this point, through potential negative impacts from increased borrowing costs and reduced supply capacity going forwards,” she said during a speech given at the Resolution Foundation.

Dhingra also voted against the rate increases during the MPC meetings in December 2022, February 2023, and March 2023, showing that there isn’t consensus between the committee over the right steps moving forwards.

As a result, it’s even more difficult to predict what the Bank might do over the course of 2023.

You would need a crystal ball to know exactly what will happen

Of course, as with any prediction, you should take these forecasts with a pinch of salt – after all, even the most informed experts and analysts don’t know exactly what’s going to happen this year.

For example, certain global events can cause inflation to increase unexpectedly, just as Russia’s invasion of Ukraine did in 2022. If a similarly significant event were to occur and inflation were to increase again, the Bank could revise its target and increase rates.

On the other hand, if Swati Dhingra is correct and rates have been raised too high, it could result in inflation falling below the 2% target. In this case, the Bank might cut rates to stimulate the economy.

As a result, it’s important to make sure that your money is suitably organised to provide you with what you need, regardless of how rates move.

Get in touch

If you’d like help managing your money amid the uncertainty of changing interest rates, please do get in touch with us at Cordiner Wealth.

Email or call 0113 262 1242 to speak to an experienced adviser today.

Please note

This blog is for general information only and does not constitute advice. The information is aimed at retail clients only.