It could boost confidence, but also risk inflation, say brokers…
The Chancellor Rachel Reeves has described it as “disappointing”, the Tories say it’s a result of Labour talking down the UK’s finances, but whatever the whys and the wherefores of the economy shrinking for a second month in a row, it’s certainly raised eyebrows.
Nowhere more so perhaps than within the Bank of England’s Monetary Policy Committee, which is meeting this week to decide whether to change its base rate. It knows that all eyes and ears will be trained in its direction come midday on Thursday, not least from those in the mortgage industry.
Despite an expectation that the economy would return to growth after a fall in September, the Office for National Statistics reported a 0.1% drop for October. Was it simply a case that activity had stalled in hospitality and retail, or did the autumn Budget on October 30 cause uncertainty in the preceding weeks?
The drag from higher interest rates may be lasting longer than expected, it’s been suggested, which heightens concerns over what the BoE will decide to do about the base rate this time.
Michael Hayes (pictured left), mortgage adviser at Neal Hayes Mortgages, believes that now that inflation is back to a manageable level, the priority of the BoE should be to help the housing market. He wants it to reduce the base rate to help cut the costs of borrowing.
“The worry is that the longer the slide continues with the economy shrinking, that it might become more difficult to arrest that slide in the future, if the Bank of England doesn’t make an effort to stimulate the market now,” Hayes told Mortgage Introducer.
“With Stamp Duty changes on the horizon, the process of buying homes is getting more difficult for certain areas of the UK and by keeping the base rate where it is, it’s only going to make it more difficult for those people to purchase their first home or move to somewhere new.”
Would a base rate cut positively impact brokers’ businesses?
The Bank is not widely expected to reduce borrowing costs again this week, but what would a base rate cut mean for brokers?
“I think it would make a big difference in terms of confidence in the market,” said Hayes, “at a time when confidence in the wider economy is low. A 0.25% reduction in itself won’t change things dramatically for the consumer, however the message it sends is that better things are coming and that purchasing a home or refinancing in the future will be on better terms in 2025 than they are today, which can only be a good thing for brokers.”
Broker firm Versed Financial has pledged to closely monitor the Bank’s decision.
“While the base rate remains a critical tool to control inflation, the current economic climate poses a dilemma,” said director Katrina Horstead (pictured second from left). “On one hand, the recent data showing economic shrinkage suggests a need for growth stimulation, and reducing the base rate could, in theory, ease borrowing costs and encourage spending. This would particularly benefit homeowners looking to remortgage, businesses seeking investment, and first-time buyers hesitant to enter the market due to higher mortgage costs.
“However, inflationary pressures remain a concern. Cutting the base rate prematurely could risk reigniting inflation, especially if energy prices or global supply chain issues resurface. Perhaps the committee should hold rates steady for now. A cautious approach allows for more economic data to come through, ensuring inflation remains under control while also assessing whether the economy’s contraction is temporary or indicative of a deeper trend.”
Stability is key for both borrowers and lenders, and reducing rates too soon could send mixed signals about long-term confidence in the economy, Horstead believes.
“Overall, while a base rate reduction would create positive momentum, the practical impact for brokers would likely be incremental,” she reasoned. “The real game-changer would be sustained and significant cuts in rates over time, which would lead to greater affordability and more sustained confidence in the housing market. For now, brokers would need to balance any short-term boosts in demand with managing client expectations about the scale of savings and the broader economic outlook."
Read more: "Ho, ho, high!" Inflation dampens Christmas base rate cut hopes
What will the Bank of England consider in making its base rate decision?
Peter Tsouroulla (pictured second from right), head of mortgages at Trinity Lifetime Partners, believes the Bank may proceed cautiously and leave the rate unchanged due to inflation risks and economic uncertainty.
“Even with weak economic data, inflation remains a key concern,” said Tsouroulla. “The BoE is focused on controlling inflation and might hold off on cuts if inflation is still above target. Negative data could signal underlying economic weakness, but the BoE may prefer to keep rates higher to avoid stoking further inflation or financial pressure.”
He added: “Don’t forget, base rate reductions don't mean fixed rate reductions.”
Meanwhile, Claire Towe (pictured right), co-founder of broker firm Meet Margo, doesn’t underestimate the challenging decision facing the Monetary Policy Committee.
“The economy has shrunk for two months in a row, but inflation has risen to 2.3%, above their 2% target,” Towe noted. “A base rate cut could stimulate borrowing and spending, potentially boosting the economy, but it also carries the risk of pushing inflation even higher.
“Holding the rate could give the bank more time to assess how inflation and the economy are behaving without taking a risky gamble. They must strike a balance between supporting economic growth and keeping prices under control.”
According to Towe, a base rate cut could lead to more activity in the mortgage market, as cheaper borrowing typically encourages people to buy or remortgage.
“However, the full impact depends on how quickly lenders pass on a cut to their product offerings and how consumers respond to a potential shift in rates,” she said. “Whatever the Bank decides, it will affect businesses, homeowners, and savers alike. While everyone might wish for a Christmas miracle in the form of a rate drop, if it comes at the cost of higher inflation and increased uncertainty into 2025, then we need to be careful what we wish for.”
