The new norm
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.
One undeniable constant over the past four decades 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 era of abundant, low-cost financing 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 a staggering 10%, subsequently decreasing to around 8% during the early to mid-1990s. From 2000 until the financial crisis of 2008, the average rate settled at 5%. Subsequently, the aftermath of the financial crisis, a severe recession, and the global pandemic led to an extended period of historically low rates. UK interest rates languished at an average of 0.5% until late 2021, signifying a new paradigm of sub-1.0% interest rates.
Several factors pushed equilibrium or normal interest rates even lower during this era. Western growth rates declined, curbing the demand for investment capital, while the world transitioned towards service-based, less capital-intensive economic activities. The succession of shocks over the past 15 years, from the financial crisis to the pandemic, amplified uncertainty and dampened risk appetite.
Simultaneously, a global savings glut emerged as ageing populations in the developed world saved more, and households in fast-growing Asian economies accumulated savings. This surfeit of savings effectively suppressed interest rates.
Since the 1980s, central banks worldwide gained independence from political control and assumed the responsibility of maintaining low inflation. This bolstered the credibility of monetary policy and set the stage for lower expectations regarding inflation and interest rates. The process of globalisation, coupled with China’s entry into the global trading system in 2001, also contributed to lower prices and inflation on a global scale.
Shifting from a low to a high-interest rate landscape
The global economic landscape transitioned from one fretting about high interest rates and inflation in the 1970s and 1980s to a new reality where policymakers increasingly worried that rates were too low. Deflation, rather than inflation, became the primary concern.
However, 2022 brought about an abrupt shift. Inflation rates in Europe and North America surged to around 10% or even exceeded this threshold. Inflation emerged as the paramount concern. The Bank of England raised rates from a mere 0.25% in December 2021 to 3.50% in 2022, the highest level since 2008. Financial markets anticipated rates to peak at approximately 4.6% in September of that year. This can be verified via BOE’s official bank rate history.
The Bank of England’s chief economist, Huw Pill, contends that the ultra-loose monetary policies of the past 15 years were exceptional and that recent interest rate increases should be perceived as a normalisation of policy. According to this view, low rates were a response to the deflationary effects of financial crises, Brexit, and the COVID-19 pandemic. As these shocks recede, central banks should adjust interest rates to establish a new, higher normal.
The current scenario undoubtedly marks a significant departure from the past. Yet, when it comes to defining what’s ‘normal’ in terms of base rates, the answer largely hinges on one’s perspective.
Individuals in their early 30s have experienced nearly zero interest rates throughout their entire adulthood, only to witness the Bank of England’s (BoE) recent tightening cycle. In stark contrast, older people will offer an entirely different viewpoint, reminiscing about a time when interest rates averaged a substantial 6.2 per cent between 1975 and 2023. This striking contrast in experiences underscores the varying interpretations of ‘The New Norm’ in today’s economic climate.
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. To gain insight into how these rate changes affect your monthly payments, you should utilise a mortgage calculator.
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 the day when 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?
In our role as mortgage advisers, it is of utmost importance that we remain adaptable in the face of this ever-changing landscape. The constant fluctuations in interest rates carry substantial ramifications for both 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.
