What’s next for the UK economy – and what could it mean for your money?

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From July’s general election to the Bank of England’s next decision on interest rates – there’s a lot going on in the UK. Here’s how these events could influence how you invest, spend, save and borrow money.

Standard Life is part of Phoenix Group, the UK’s largest long-term savings and retirement business. We work closely with our colleagues in the Phoenix asset management team to determine the outlook for markets and the investment strategy for our pension solutions. Below, they provide some background and views on what’s happening in the UK.

Why are UK interest rates at a 16-year high?

At the time of writing, the Bank of England (the Bank) charges banks and other lenders 5.25% interest to borrow money, and this drives the rate that’s then passed to you. Known as the UK Bank Rate, it’s at its highest level in 16 years. We wrote about what led the Bank to raise it in this article last year. 

In short, though, the main cause is inflation, or the rate at which the price of goods and services is increasing. Part of the Bank’s job is to keep this under control. But in recent years it has been unusually high, both in the UK and elsewhere, leading to the cost-of-living crisis.

Raising interest rates makes borrowing money more difficult and expensive. The idea is that when loans are harder to get and cost more to repay, people and businesses spend less. This reduces demand for goods and services, leading – eventually – to lower prices.

While inflation has been falling gradually since it reached a 41-year peak in October 2022, interest rates have stayed high. 

How do high interest rates impact my money?

There are good and bad points to interest rates staying higher for longer. On the one hand, you might get a higher rate on any cash you have in savings accounts. On the other, higher interest rates can make borrowing – such as mortgage, loan and credit card repayments – more expensive.

If the Bank of England starts to cut interest rates, then the opposite scenarios will take place: you might earn less interest on any cash savings, but it could be cheaper to borrow money.

Interest rates can also have a big effect on any investments you may have. If you’re saving into a pension pot, it’s likely that your money is invested in a fund, or funds. In turn, these funds might invest in shares in companies (equities), government bonds or other assets. All can be influenced by interest rates. 

Equities, for example, have the potential to increase in value when interest rates fall. Lower rates mean that consumers have more money to spend, so company earnings – and often their share prices – increase. In addition, lower rates can make it cheaper for companies to borrow money, which they might use to support growth.

So, the question now is less about if a cut will happen. Instead, it’s …  

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When will the Bank of England cut interest rates?

Many commentators predicted a cut by the middle of 2024.  Earlier this year, we thought it was likely that the Bank would make its first Bank Rate cut in June. But inflation numbers released in May were higher than the Bank – and many others – expected. 

The Consumer Price Index (CPI) which measures overall inflation, showed that the prices of goods and services had increased by 2.3% over the 12 months to April. This was a little higher than the Bank’s expected increase of 2.1%, but still a drop from March’s equivalent figure of 3.2%. 

Separating out inflation in the service sector tells a slightly different story, however. This is important because services form such a large part of the UK economy, covering everything from haircuts to holidays. The annual services inflation rate, at 5.9%, was only slightly lower than March’s 6.0% and troublingly higher than the Bank’s estimate of 5.5%. 

Now, with services inflation staying stubbornly high, we doubt that the Bank will cut rates in June. Instead, we’re pencilling in a cut in August, although a lot could happen between now and then.

What about the general election?

One event that we know is coming is the general election on 4 July. 

While the polls currently suggest that the Labour party is most likely to win the vote, a lot of uncertainty remains. But we think it’s quite clear that whichever party triumphs, it’ll have a daunting task when it comes to managing spending and getting national debt under control. So far, Labour has suggested that if it’s elected, it will make only small changes to government spending and taxes.  

When it comes to interest rates, though, the Bank of England will probably want to wait until the outcome of the vote before making changes. Meaning the election is another factor that makes a mid-year cut less likely.

What should I be thinking about just now?

As we explained above, we think that UK interest rates may stay high for a while longer, at least until August 2024. While they’re at this level, it’s important to think about how they might affect repayments on debts like mortgages and to consider how to make the most of any cash savings. We wrote about how high interest rates might affect mortgages, pensions and savings in 2022 and many of the points we raised then are still valid now. As always, though, if you’re unsure about what interest rates changing – or indeed staying the same – could mean for you, we would recommend speaking to a financial adviser.

The information in this article is based on our understanding in June 2024 and should not be regarded as financial advice. 

Pension plans are investments. Their value can go down as well as up and could be worth less than was paid in.

Past performance is not a reliable indicator of the future.