"Inflation is set to be back on target by the summer"
A senior Bank of England policymaker has said interest rates may need to be cut this year as the pressure on households from high borrowing costs ripples through the market.
The central bank increased the base rate for the 10th consecutive time at the beginning of the month, pushing interest rates up to 4% in a continued attempt to tame inflation.
However, despite the base rate reaching a 15 year high, Andrew Bailey, governor of the Bank of England, has said interest rates may need to reach 4.5% this year; which has been met with resistance by many brokers.
Bank of England – inflation targets
Samuel Mather-Holgate (pictured), independent financial adviser at Mather and Murray Financial, said if the Bank of England does not cut rates this year the whole system needs to be reinvented.
Mather-Holgate said that inflation is set to be back on target, if not below, by the end of the summer, so he does not understand why the central bank would need to increase rates higher.
“The economy will be in the bin if it chooses to raise rates further, unemployment will be rising and homeowners will not be able to afford to eat,” he said.
Mather-Holgate said rate cuts will come eventually, however he believes they will not come fast enough for the general public.
“The central bank is out of touch with the wider population but also with the economic reality of the situation; they cannot see the obvious repercussions of their inaction,” he said.
Amit Patel, adviser at Trinity Finance, said higher borrowing costs impact the whole economy from mortgage holders to small and medium-sized businesses.
“With inflation expected to fall over the coming months, the Bank of England must take corrective action and reduce the base rate,” he said.
Patel believes the longer the cost of borrowing remains expensive, the more detriment it will have on smaller businesses which are the lifeblood of the economy.
Samuel Ewen, managing director at Rosehill Financial Services, believes the market will see a sharper decrease in inflation over the next few months, as more and more borrowers remortgage at higher rates, along with eye-watering household bills and businesses facing increased running costs.
“There are also new property purchases to take into account, the data regarding the impacts of increasing rates for new purchase transactions will naturally lag, as completions do not happen overnight,” he added.
That said, Ewen believes although the market may see another increase to the base rate in March, he thinks that the Bank of England will soon be under increasing pressure to reduce rates.
Bank of England – when could rate cuts occur?
Lewis Shaw, owner and mortgage broker at Riverside Mortgages, said that, without a doubt, the Bank of England will cut the base rate at the end of the year, with the reduction likely falling between November and December.
“Hopefully, it will cause consumer sentiment to return and drive mortgage rates lower, which will be a welcome relief for many mortgage holders,” he said.
Shaw added that even those tied into fixed rates will relax in the knowledge that the ship is steadying.
“As increasing numbers of borrowers remortgage on to much higher interest rates this year, the disastrous consequences of ever-rising house prices will play out in full view,” said Graham Cox, director at Self Employed Mortgage Hub.
Following this, Cox believes that the pressure on the Bank of England to cut the base rate will be enormous. For that reason, he expects to see a rate cut in late spring or early summer, and possibly two or three cuts before the year end.
Do you expect the Bank of England to reduce the base rate this year? Let us know in the comment section below.
