And don't count on a new year cut either…
If all you want for Christmas is a further Bank of England base rate cut… think again. A spike in inflation looks set to put a dampener on any hope of a reduction in December – and even in February too.
That’s according to respected industry commentor Nicholas Mendes, mortgage technical manager at leading London broker John Charcol, after UK annual inflation hit 2.3% in October.
This was notably up from 1.7% in the previous month, and above the government’s all important target of 2%, according to data from the Office for National Statistics. So, the sherry and mince pies may be in short supply when the Monetary Policy Committee meets on December 19, metaphorically at least.
The latest inflation figures, showing a stronger-than-expected rise underscores the ongoing economic challenges in the UK, said Mendes (pictured left).
“Although the increase in gas and electricity prices was a major driver, the Bank of England’s Monetary Policy Committee is likely to focus on other indicators, such as core inflation and the performance of the service sector, when determining their next steps,” he told Mortgage Introducer.
“This context significantly diminishes the likelihood of any further interest rate cuts in December, with markets assigning just a 16% probability of this occurring. Even February remains uncertain, given the persistence of inflationary pressures.”
The update doesn’t bode well for those hoping to see mortgage rates reduce or even stabilise, in Mendes’ view.
“The inflation data suggests that fixed mortgage rates are likely to continue rising as markets recalibrate their forecasts,” he said. “Lenders are adopting a cautious stance, mirroring the broader market sentiment. The lack of competition among lenders towards the end of the year further supports the expectation of rising fixed rates.”
Certainly, there may not be much ‘ho, ho, ho’ in the market, as it tightens its belt to accommodate the inflationary rise.
“As the festive period draws closer, many lenders are prioritising operational efficiency and service levels over aggressive pricing strategies,” said Mendes. “While larger institutions, such as HSBC, may have the capacity to remain competitive, the overall trend points to a tightening market.”
Borrowers would be well advised to act promptly to secure deals rather than delaying in the hope of falling rates, Mendes urged.
“The current trajectory indicates that reductions are unlikely in the short term,” he noted. “Persistent inflation and a reduced level of competition among lenders reinforce the view that mortgage pricing will remain under upward pressure as we move into the new year.”
He added: “Service sector inflation, a crucial component of core inflation, is expected to be a focal point for the MPC as they assess their policy options. With inflation proving more resilient than anticipated, policymakers are likely to adopt a cautious approach to avoid exacerbating the situation.”
What does the inflation rise mean for borrowers?
The inflation rise was widely anticipated, according to David Hollingworth (pictured centre), associate director at L&C Mortgages and could also bring further headaches for borrowers.
“Although the rate lifting above target is not a shock, at 2.3% it is a little higher than many had expected,” said Hollingworth. “That will pour more cold water on the prospects for another cut to base rate to come next month, which will be disappointing news for those on a variable or tracker rate mortgage.
“Fixed rates have already been on the move and have climbed in recent weeks, often by 0.25% of a percentage point or more. That has driven fixed mortgage rates upwards, and all the UK high street lender rates are now back above 4%, with only Allied Irish Bank clinging onto anything below that. Borrowers will therefore need to remain on their toes, as mortgage deals are still in something of a state of flux and lenders are repricing regularly.”
Read more: Base rate cut fails to generate Scottish market activity - broker
What will happen to mortgage rates?
Meanwhile, Ben Thompson (pictured right), deputy CEO at Mortgage Advice Bureau, commented that the inflationary hike was untimely.
“Inflation rising isn’t the best start to the festive season for those looking to remortgage or get on to the property ladder,” Thompson said. “With inflation rising, and the Bank of England signalling its restraint in cutting the interest rate, it is possible that mortgage rates could stay higher for longer.”
Thompson did sound a positive note though, saying it was good news that the UK was nowhere near the highest levels of inflation and mortgage rates seen in the past two years.
“There remain good deals to be had,” he said, encouragingly. “Buyers should be wary of trying to time the market. Now is as good a time as any to begin the process of getting mortgage ready by speaking with an adviser.”
