How will this impact mortgage rates?
With UK inflation slightly higher than the target rate in August, the Bank of England (BoE) has held the base rate steady after making a rate cut last month.
Voting by a majority of 8–1, members of the central bank’s Monetary Policy Committee (MPC) decided to maintain the base rate at 5.00%.
Prior to the rate cut last month, the central bank has not changed the base rate since September 2023. Experts are still expecting another interest rate reduction before the year ends.
Today’s decision to maintain the base rate is in line with market expectations, with probability for a rate cut dropping from 35% late Tuesday to just 26% by Wednesday morning, following the release of the latest inflation data.
The rise in services inflation yesterday had all but confirmed the hold decision today, said Nicholas Mendes, mortgage technical manager at John Charcol.
“Financial markets had already priced in a pause on interest rate cuts, but with core inflation accelerating from 3.3% to 3.6% — higher than the forecasted 3.5%,” said Mendes. “We now anticipate the next 25-basis point cut in November, followed by rate cuts at alternate BoE meetings until June.”
A survey from the Building Societies Association showed that around one in five (21%) UK adults agreed with the MPC’s decision to leave the rate at 5.00% for now. Over four in 10 (44%) believe that, given the current economic conditions, the Bank of England should have implemented another rate cut today. Unsurprisingly, mortgage borrowers are the most eager for a rate cut, with 59% expecting a rate cut decision from the BoE.
Mendes, however, pointed out that today’s rate announcement “does not change the clear, medium-term downward trend in mortgage rates.”
“While we can expect a temporary lull in the competitive rate cuts seen in recent weeks, this will be just that—a lull, not a reversal in direction,” he said.
Mendes added that the gap between two- and five-year fixed mortgage rates is expected to further narrow.
“By the end of 2024, five-year rates could drop to around 3.5%, while two-year rates are expected to be around 3.8%,” Mendes said. “As lenders respond to lower funding costs and increased competition, we could see even more attractive mortgage deals.
“This would provide financial relief to homeowners, encourage first-time buyers, and motivate home movers, boosting both the housing market and the wider economy. While the best rates have been reserved for those with larger equity or deposits, mortgage rates for higher LTVs of 90% and 95% could potentially reach around 4.5% by the end of the year.”
Mendes predicted that in 2025, mortgage rates would decline further, likely by around 0.5%, driven by ongoing bank rate cuts and stabilising economic conditions.
“As economic confidence improves and inflation remains controlled, lenders will have more flexibility to offer competitive rates, making homeownership more accessible and stimulating further growth in the housing market.”
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