In our earlier publication titled “ Need To Remortgage | Connect’s Professional Insightful Response to Rising Rates | 2024,” we briefly discussed the possibility that historically low interest rates of 1, 2, or 3 per cent might no longer be within reach. In this article, we aim to delve deeper into this topic, providing a more comprehensive perspective on the evolving mortgage rate scenario, its history and its potential implications.
Over the past four decades, one undeniable constant has been the gradual decline of interest rates in the Western world. Though fluctuations occurred, the overarching trend was undoubtedly downward. However, as we navigate the current trajectory of interest rates, we must question whether the abundant, low-cost financing era has genuinely drawn to a close. Is the new norm a shift towards higher rates, or can we still expect the historically low rates to remain the new norm in the foreseeable future?
Historical interest rate trends
In the 1970s and 1980s, the UK base rate averaged an astonishing 10%. However, by the early to mid-1990s, rates fell to around 8%. From 2000 until the 2008 financial crisis, the average rate stabilised at 5%. Afterward, economic turmoil, including a severe recession and a global pandemic, created a prolonged era of historically low rates. UK interest rates averaged 0.5% until late 2021, ushering in an unprecedented period of sub-1.0% rates.
A combination of factors contributed to lower equilibrium interest rates during this period. Declining Western growth rates reduced demand for investment capital. Moreover, economies shifted towards service-based, less capital-intensive industries. Additionally, a series of shocks over 15 years, including the financial crisis and pandemic, heightened uncertainty and reduced risk appetite.
Meanwhile, ageing populations in developed countries prioritised savings, while fast-growing Asian economies accumulated significant reserves. This global savings surplus kept interest rates persistently low.
Since the 1980s, central banks have gained independence from political influence, focusing on controlling inflation. This independence strengthened monetary policy credibility, reducing inflation expectations and interest rates. Furthermore, globalisation and China’s entry into global trade in 2001 lowered production costs. Consequently, inflation rates declined worldwide, supporting the case for lower interest rates.
Shifting from a low to a high-interest rate landscape
The global economy has experienced substantial changes over recent decades. Policymakers once grappled with high inflation and interest rates during the 1970s and 1980s. Yet, concerns later shifted towards rates that were deemed too low. Deflation eventually replaced inflation as the primary threat.
In 2022, the economic environment shifted dramatically. Inflation rates across Europe and North America surged to around 10% or even higher. Consequently, inflation emerged as the central concern for policymakers. The Bank of England responded decisively, raising rates from 0.25% in December 2021 to 3.50% by the end of 2022. This marked the highest level since 2008.
Financial markets anticipated interest rates to peak at approximately 4.6% by September 2022. These projections aligned with historical trends recorded in the Bank of England’s official bank rate history. Such data highlights the sharp pivot in monetary policy within a short period.
Policy Shifts and Economic Adjustments
Huw Pill, the Bank of England’s chief economist, asserts that the recent interest rate hikes represent a return to normalcy. He argues that the past 15 years of ultra-loose monetary policies were extraordinary. Low rates temporarily counter deflationary pressures caused by financial crises, Brexit, and the COVID-19 pandemic.
As these economic shocks fade, central banks aim to recalibrate rates towards a stable and sustainable level. This approach suggests higher rates reflect a new normal rather than an anomaly. Policymakers believe adjustments will create stability in long-term financial planning and mortgage markets.
Defining ‘Normal’ in Mortgage Markets
Today’s economic landscape represents a clear break from the past. However, defining what constitutes ‘normal’ interest rates remains subjective. Perspectives on this matter vary significantly, depending on generational experiences.
Individuals in their early 30s have primarily seen near-zero interest rates during adulthood. Recent rate hikes may appear dramatic to this demographic. Conversely, older generations recall an era when rates averaged 6.2% between 1975 and 2023.
This stark contrast highlights the diverse interpretations of current trends. As borrowers assess mortgage options, understanding these historical patterns can help frame expectations in the evolving UK mortgage market.
What impact will fluctuations in interest rates have on my financial situation?
If you currently have a loan or mortgage with a variable interest rate, any adjustments to the Bank Rate can potentially influence the amount you need to repay. On the other hand, if you’ve secured a fixed-rate loan, you will experience alterations in your interest rate after your fixed term.
It is crucial to grasp the potential consequences of interest rate variations on your financial capacity to meet your obligations. You should utilise a mortgage calculator to gain insight into how these rate changes affect your monthly payments.
Furthermore, if you hold savings in a bank account that accrues interest, alterations in the Bank Rate may lead to adjustments in the interest rates you receive on your savings. Understanding these dynamics is essential for managing your financial portfolio effectively.
What will interest rates be in 2024?
In the intricate world of economics, opinions regarding the eventual resting place of interest rates will vary widely.
Until we can acquire a crystal ball capable of answering challenging queries, we must accept the reality that predicting interest rates for 2024 remains an uncertain task, greatly influenced by economic conditions and inflation trends. With inflation rates currently elevated, the need to sustain relatively high interest rates persists in steering inflation back towards more customary levels.
Whom can you place your trust in?
It is of utmost importance that we remain adaptable as mortgage advisers in the face of this ever-changing landscape. The constant fluctuations in interest rates substantially impact our clients and the entire mortgage industry. 
To best serve our clients and ensure they secure optimal mortgage solutions in this emerging era defined by what we call “The New Norm,” where interest rates are a paramount concern, it is imperative to maintain a vigilant approach. This entails staying well-informed, offering pertinent advice, and swiftly adapting to these shifts, making agility a crucial asset in navigating this dynamic environment.
Thank you for reading our publication, “The New Norm | The Role of Brokers in Interest Rate Advice.” Stay “Connect“-ed for more updates soon!
