A whole generation of young adults has never known UK interest rates above 6%. In fact, over the past decade UK interest rates have rarely topped 1%. But that generation will soon experience a return to high rates.

As inflation began rising last year, the UK central bank predicted it would need to raise interest rates to slow a ‘hot’ UK economy. At the time, the suggestion was that rates would increase incrementally at a slow pace.

But since Prime Minister Liz Truss and former Chancellor Kwasi Kwarteng’s mini-Budget, the markets have been in a tailspin, plunging the value of sterling to record lows and raising the cost of borrowing for the UK government.

The appointment of Jeremy Hunt as Chancellor has stabilised the markets somewhat, but the Bank of England has said that it will have to raise interest rates further and quicker than planned.

Yael Selfin, Chief Economist at KPMG, says: “We were always expecting interest rates to go up further, but with the latest development the expectations are that interest rates will go up by more than we had originally pencilled in. We now expect interest rates to peak at a higher level than what we had anticipated prior to the mini-Budget.”

Until Hunt announced the tearing up of Kwarteng’s mini-Budget on Monday 17 October, expectations were that interest rates would peak at around 4.5% by February 2023 – which was higher than the 3.25% that was forecast before the mini-Budget.

Selfin says markets are now expecting rates to peak at between 5.5% and 6%, but she adds: “We'll hopefully see them peak at a little bit lower than that. Generally, we are expecting interest rates to remain higher for longer.”

One silver lining, perhaps, is that with an imminent recession, demand in the UK is expected to be much weaker and therefore current inflationary pressures should decline by 2024, resulting in an expectation that rates will fall “a little” in 2024.

“There will be room for the Bank of England to lower rates a little. There will be a bit of breathing space there. So, we could see rates stabilising at around 3.75% by the end of 2024,” Selfin says.

For now, though, the UK is still facing significant hikes for the remainder of this year. Expectations are that the BoE will raise rates by 1% in November, another 0.75% in December and 0.50% in February. Rates are then expected to remain at around 4.5% until mid-2024. The last time rates were above 4% was in October 2008, at the height of the global economic recession.

Selfin says: “By [2024] inflation will be much weaker as the economy could be very weak, so we could see the Bank of England easing rates a little bit to maybe 3.75% by the end of 2024 and keeping it at around that level for a while.”

The main immediate concern is the impact on the property market. A correction in the property market will have serious implications for the economy as a whole.

“There's also a genuine fear about the squeeze on corporates because they are more exposed to immediate changes in interest rates,” says Selfin. “Most corporate debt is floating so we could see immediate pressure there. Businesses are already subject to challenges around supply chains and rising costs. But higher borrowing costs will also have an impact on the housing market and consumer spending, which could trigger a deeper recession in the UK if we see a significant fall in house prices.”

In light of higher corporate borrowing costs, insolvencies could rise, too. Insolvencies have already been rising over the past year, but economists expect the rise could increase faster now.

Households and businesses are facing exceptionally challenging circumstances as we enter winter and a potential recession. After decades of low UK and global interest rates, the tide is turning, and it looks like higher rates are here to stay for the next few years at the very least. It will require a significant amount of belt-tightening and a change in mindset to adjust to a higher-interest-rate landscape. There will be opportunities resulting from this but for now, it will likely involve more pain.