What’s going to happen to interest rates? And what it means for mortgages, savings & more!

The Martin Lewis Podcast

Martin Lewis explores the future of UK interest rates with economist Jack Meany and mortgage broker Andrew Montlake. The discussion covers h

Key takeaways

• Jack Meany predicts interest rate increases might occur as early as November due to Middle East tensions.
• The market is currently pricing in more rate hikes (four 25bps) than the Barclays economist expects.

Main topics

• Interest Rate Forecasts
• Bank of England Policy

Notable quotes

If you increase the mortgage term, you're spreading the length of the debt, and spreading the length of the debt means you pay more interest.

Conclusion

The episode provides practical guidance for navigating a period of eco

Transcript preview

Speaker 2 (0:00) This BBC podcast is supported by ads outside the UK. Welcome to the Haunted Library. Have you come in search of a tale? This podcast invites you to browse the shelves and find stories that will linger long after you've left this place. From gothic masterpieces to pulpy penny dreadfuls, join me, Colin Morgan, with new episodes twice a week. Find The Haunted Library wherever you get your podcasts. Speaker 7 (0:39) We've got quite a big cheese. I Speaker 4 (0:41) mean, yeah, a full fromage. A full fromage. Will they change? When will they change? How much will they change? It matters today. Speaker 3 (0:48) I'll try not to be too cheesy. Don't worry, Martin will look after the cheese. Speaker 4 (0:51) If you increase the mortgage term, you're spreading the length of the debt, and spreading the length of the debt means you pay more interest. Hello, I'm Martin Lewis, and this is the cunningly named The Martin Lewis Podcast. Speaker 2 (1:03) What Speaker 6 (1:04) that's going to be about. Speaker 4 (1:05) And this is our Big Topics episode, where each week we lead on one main subject to help you save. Usually, most of it comes from my BBC Radio 5 live show with Adrian Childs, but there's also bonus money-saving tips and tricks just for you lucky, lucky podcast listeners. In today's episode, it's a big one. What's going to happen to interest rates over the next year? The mood music, is there going up? But how much by, how certain is it, and when will they go up? And then how do you take that information and use it to make the best decisions about your savings, loans, credit cards, and mortgages? I'm joined by an economist. I'm joined by a mortgage broker. We're going to delve into it and make sure that you are tooled up with everything you need to know to get you through the next year. Then the tellers. is all about what's the most expensive thing you've bought and never used. Whether it's you were blown away by a Dyson hairdryer or sank in your own hot tub. And this week's mastermind, or I admit, I think I may have jumped the shark in the intro to it. I got a little bit carried away with my thespian side, but it's good anyway. It's a question on savings. Play the theme tune. Speaker 7 (2:20) OK, so we normally touch on interest rates when there's an announcement of them changing. So... Last week. We had one last week. But why now, Speaker 4 (2:30) then? Because what I wanted was a sort of calm consideration of where we're going. The important thing to understand about interest rates... So when we're talking interest rates, let's take it back to basics. We are talking the Bank of England UK base rate. That sets the standard interest rate for the UK. But the fact it hasn't moved last week is probably less interesting than the fact that the vote was six to three. So of the nine members of the Monetary Policy Committee who meet every six weeks or so to decide what's going to happen to UK interest rates, six of them voted to keep it on hold. Three of them voted to increase it from its current 3.75 % level, where it's been since December 2025. Now, what's important about... people's predictions of where interest rates are going. Now, that was a signal that we have the mood music is upwards. And we're going to be talking to a proper economist to discuss that in more detail in a moment. But what I wanted to just make sure everybody understands is predictions about future interest rates are not just a crystal ball issue. They materially affect what happens today. What the markets think will happen in future affects the prices of... products that you can get today in very simple terms. So the main area that has a difference is if you are a bank or a building society and you are launching a fix, whether that be a mortgage or a savings products, you're trying to price it effectively at the interest rates over the period which the fix lasts for. And that's done by looking at what the swap markets are and where they can buy different types of instruments to do so. So the fact that the mood music indicates that interest rates in the UK are likely to go up over the next year has a tendency to push the rate at which you can get a fix at up, both on mortgages and on savings and personal loans are fixed too and credit cards. And we'll go into the minutiae of how it varies in each one of those later. But that's the big picture, why this isn't just a sort of naval gaving. Oh, what's going to happen to interest rates? Will they go up or down? It matters today. Speaker 7 (4:40) OK, we've got a guest here and you've got quite a big cheese. Speaker 4 (4:45) A full fromage. A full Speaker 7 (4:47) fromage. Chief UK economist at Barclays Bank, no less. We are not worthy. Jack Meany. You're not Speaker 4 (4:53) worthy. Speaker 7 (4:53) Well, I'm not worthy. Martin is, obviously, which is why he's come on. Jack, how are you? Speaker 3 (4:58) Yeah, very well, Adrian. Thank you. I'll try not to be too cheesy. OK. Speaker 7 (5:03) Don't worry, Martin will look after the cheese. We're well covered in the cheese department. Speaker 4 (5:07) Any pun will be grabbed. It's his Speaker 7 (5:10) middle name. So go on, Martin. Speaker 4 (5:13) OK, so let's just break this down and go simply. Where are you at on interest rates? Will they change? When will they change? How much will they change? Speaker 3 (5:23) I mean, Martin, it's looking very likely now, given what's happening in the Middle East, that interest rates will change, that they will ultimately have to go up. And I think probably the most likely place we'll see the next increase will be as soon as November. We've seen a lot of signaling from the Bank of England that that's where their heads are at. And that's what we think now and what the market thinks now is most likely. Where my personal view would differ from the market, the market thinks that's going to be the first in a sequence of interest rate increases. If I look at pricing on my computer screen this morning, it tells me that the market expects four 25 basis point increases, so a whole percentage point more on the short-term interest rates. So is that this Speaker 4 (6:05) time next year? So over a year, say, it's expecting we'd move it from 3.75 % to 4.75%. Speaker 3 (6:10) Exactly that, exactly that. So over the next 12 months, you will see one percentage point going up. Now, I think it's going to be much less severe than that. I think we'll maybe see one quarter point increase, probably if the Middle East continues through the end of the year, a second one early next year. But the market is running far ahead of that. Speaker 4 (6:30) So if I just bring this into my sort of more my area of this type of stuff I look at. I know. We're currently looking at, last week I said it was a 24 % predicted rise in the price cap in January. It's come down a tiny bit. It's now looking at a 22 % predicted rise. I mean, I think it's very likely it'll be between 15 % and 30 % when we get there. And that in itself would add, you know, 0.5%, 0.6 % to CPI inflation. And just to break this down for people, you know, when... Inflation is what the Bank of England is charged at keeping down. Inflation is a measure of how prices rise. And its main weapon for keeping inflation down is to put interest rates up. So wouldn't that signal it would be a bit stronger than a 0.25 % rise? Speaker 3 (7:17) So the real difficulty the bank has, and you're absolutely right, Martin, I would agree with those numbers you've just given about how much the recent moves in oil and gas prices will affect the prices people feel in the shops. But the difficulty is a lot of that is already baked in. That will feed through in terms of pump prices very quickly. But then ultimately, it will fade out of those inflation numbers also quite quickly. So there is nothing the Bank of England can do to change that. It can't. reopen the Strait of Hormuz. And if it was to jack up interest rates 5 % from now, it still wouldn't be able to do very much to change what's going to happen over the next couple of months. So really, they're worried about what's happening further out into the future. This Speaker 4 (8:00) is the question I've wanted to ask. I put something on social media about this today. I wanted to ask a proper economist, because I'm a consumer finance specialist. And I know Adrian's got a question he wants to come in on. So on my basic, I've got a decent generalist understanding of these issues. The Bank of England, if it puts interest rates up, it does that to make borrowing more expensive and saving more rewarding. That means people are less likely to borrow, and normally you borrow to spend, and it means you are more likely to save, and if you save, you're spending less. And both of those things are to take money out of the economy to reduce demand in order to reduce inflation. That's the very rough generalised theory. But the problems and what's inflationary at the moment is not coming from demand. It's not coming from buyers. It's coming from sellers because of what's going on in the Middle East over oil and gas and how that feeds into the price cap and how that feeds into the petrol pumps. It seems to me it's a rather odd tool that the Bank of England is putting interest rate up, which restricts demand, which shrinks the economy when we want the economy to grow, when the problem's supply side. Is the basic problem the Bank of England doesn't have the tool to do this job? Speaker 3 (9:12) Yeah, it's a very blunt instrument they've got, but it is broadly the only instrument they've got in order to try and keep prices or price growth in terms of inflation stable. Now, I mean, the kind of point you make there is textbook economics. You've got a much better understanding than you gave yourself credit for, because ordinarily the Bank of England would just say it's a supply side shock. There's nothing we can do about that in the near term. So we will sit on our hands and look through it. The risk they've got now is that inflation has been higher than it should have been for such a prolonged period of time that they worry that people will start to bake that into their decisions. They will start to think, well, inflation is just always going to be higher now. And that requires them to lean against it, to slow the economy a little bit, to bring inflation back down to target. So that's why they're worried more about what's going to be happening to inflation in. two years' time rather than what's going to be happening to it in the next three to six months. Can Speaker 7 (10:12) I ask you something about how you decide where the economy is going? And rather modestly just then, you said that you'd look at a computer and see where the market thinks. In other words, see, on average, where everyone else thinks it's going. And that has to inform your thinking. I mean, there must be more to your job than that. Because when I could sit there and look where the market's going, and, you know, that wouldn't make me... chief UK economist at Barclays Bank. So what else do you look at? I Speaker 3 (10:40) mean, yeah, thankfully, Adrian, keeping me in work means there's actually a lot more that we can dig into. I mean, probably the biggest way to think about this is what are the type of things that would put up prices in the shops? Well, first of all, you have the cost of employing people. So we look at what's going on in the labour market. We look at what's happening to people's wages. to the power they have to bargain for stronger wages, to how many people are switching from one job to the other. There's lots of things we can look at in that area. Okay, that's Speaker 7 (11:11) really interesting. When you look at, see what the market thinks, is there something anybody can go on and look at, well, what's the best place to find out what the market thinks interest rates will be in two years, five years, ten years? Is there a simple place to go? Speaker 3 (11:31) I mean, it's all available on the Bank of England's website if you are inclined to go and start downloading Excel spreadsheets. But that's probably not everybody's cup of tea. So, I mean, I think normally the kind of the best way to do it is to look at the headlines that come out after you've seen a Bank of England decision or in the kind of immediate build up. Martin and this show does a great job of bringing that out to people. But you're actually, I mean, Speaker 4 (11:58) technically, we're actually talking, when you're talking about the markets, it's not what the markets think, Adrian, it's what the market has priced in. It's actually, so this is swap rates. Well, it amounts to Speaker 7 (12:07) the same thing. No, it's Speaker 4 (12:09) actually, it's a market. So it's the swap rates in the market of where they're saying things will go. And then Jack's job effectively, I presume, I hope. correct me if I'm wrong, is that you're working inside Barclays and you're saying, actually, we think the market has overpriced this. So you can therefore take a position of saying, we think the market's overpriced this and therefore it's under, and then the people, all your traders, they can all go, well, if Jack's right, then we can make some money out of the fact that it's overpriced. Is that fair? Speaker 3 (12:37) That's a very fair characterisation. If I'm right, then everybody stays happy. Speaker 4 (12:42) Yeah. Speaker 7 (12:42) Okay. Shall we get on to some questions? Yeah, Speaker 4 (12:44) we've got loads of questions from people. And we're going to have them. But just to let everyone know, I'm going to be talking through sort of practical impact on savings later. But then we've got a mortgage broker coming on to talk about mortgages. We're going to be going through it all. But we wanted to start with the big picture with Jack. So you've got a real understanding of where we're going. OK, Speaker 7 (13:01) Barry wants to know. He says there are suggestions there may be four quarter point rises between now and July. But with global uncertainty, is it possible to predict with any confidence? Yes, you Speaker 4 (13:12) disagree, but what's the confidence level we're going to see arise? And what's the confidence level that will be up by, let's say, over half a point by the middle of next year? Speaker 3 (13:21) I mean, I think given developments in the last few weeks, I'm relatively confident we'll see a rise. I think the problem we've got at the moment is global uncertainty is much, much higher than it has been historically. And this is all a case of what's going on in the Middle East. So, you know, your guess is as good as mine in terms of what the next Truth Social post will be that can drive financial markets and kind of geopolitics. But I think conditioned on the fact that it looks like there's not. a prolonged end to the conflict on the near-term horizon. I think that means we're relatively confident there will be an increase. The reason I would still be relatively confident it's going to be one or two rather than four where the market is, is because we're really looking at what's going on in the domestic economy. And, you know, unemployment is starting to tick up. Wage growth is relatively muted. And growth is ticking along. could also still be going further towards its potential. So all of those suggest to us that actually the domestic economy is still relatively fragile in the outlook, is not creating inflationary pressure, but actually the geopolitics will dominate all of that. Speaker 4 (14:31) So let me just try and paint a picture for people so they can see something practical on this. I've got in front of me from Trading Economics the UK natural gas price per firm. It's not a forward ahead look. It's not exactly the one that goes into the price cap, but it's a pretty decent proxy for the cost of gas. And it's... Oil tends to move relatively similarly. It's not exactly the same. And electricity, because we have marginal pricing based on gas in this country, also moves with this. So just take this as one graph that shows you what happens. And this is when we can talk about why things have got worse recently. So in February, before the Iran-US-Israel conflict started, you had natural gas at around... I mean, it goes up and down every day, but let's say 75, 80p a therm. Then the conflict started and it shot up immediately to £1.25. So that's just over a 50 % rise. It held around that 120 to 140 mark until April when it looked like things were getting better. Then it dropped below a pound and it stayed from a pound to a pound 10 and dropped again in June when it got right down to 95p. So you can see gone up from 80 to a range of between 95 and £1.40. Since June, it's risen constantly. Even if we go to the end of August, the end of the last price cap assessment period, the one that's dictating what happens in October, you've got prices at £1, sort of £1.60-ish. Since then, it's been over £2. It's come down a bit in the last couple of weeks, but it's still at £1.85, which is still higher than at any point apart from the last few weeks since the conflict started. Remember, at the beginning, it was 75p. Even today, it's at £1.85. So it's two and a half times the amount. And the last month has seen the biggest peak we've had since the middle of the Ukraine crisis. And that's sort of why Jack and people are saying with what's gone on in the last few weeks, even though we've had the Middle East conflict for so long, that natural gas price I'm looking at has been so much higher in the last few weeks than it was when the conflict first started even. Speaker 7 (16:50) OK, Joseph, how exactly is raising interest rates anything other than profiteering? considering inflation is being driven by core essential spending, you can't exactly stop spending on energy and fuel. Well, Speaker 4 (17:04) you've sort of covered this. I mean, who makes money from putting interest rates up? That sort of seems to be implied in the question. Speaker 3 (17:12) Yeah, I mean, moving interest rates, as I said, is a pretty blunt tool. So it tends to be if interest rates go up, then asset prices drop. So if you're an asset holder, you're losing out. It tends to be if you're a saver, then you gain. And we saw a long period where interest rates were incredibly low for many, many years. And that was kind of damaging savers. On the other side now, as interest rates go up, that's beneficial to savers, people with debts, people that are borrowing. face the other problem. So they are kind of hit by this. The important thing I think always have in your mind though is most people fall across both of those camps. And so the kind of the impact that actually comes to you personally is a combination of those different effects. But yeah, if you're a borrower, this is going to be more painful. And if you're a saver,