Latest figures give us all something to smile about, and something to fret over
With some outlets already trumpeting the news as ‘a success for Brexit’ , the Organisation for Economic Cooperation and Development (OECD) has upgraded its growth forecast for the country. The jump puts us in second(equal) place in the G7, a great improvement from being plumb last on the list, and ensures that if it all comes true, we will beat the Germans at something.
The OECD now expects the UK’s economy to grow by 1.1% this year—an impressive increase of 0.7 percentage points from its May prediction. In a (kind of) win, this upward revision represents the largest upgrade among G7 countries this year and suggests that the UK economy is rebounding strongly after a mild recession at the end of 2023.
The impact of this growth forecast on mortgage rates is not necessarily good, however. While the news of economic expansion is positive, the OECD also warned that underlying inflationary pressures in the UK remain stubbornly high, with core inflation now expected to average 3.7% this year. Higher inflation could temper hopes for significant interest rate cuts from the Bank of England, which means that recent ultra-low interest rate predictions may have been somewhat premature.
Read more: This lender thinks we’ll see 2.75% rates in the not to distant future
Rachel Reeves, the Chancellor, welcomed the growth figures but acknowledged there is still work to be done. She stated, “Faster economic growth figures are welcome, but I know there is more to do, and that is why economic growth is the number one mission of this government.” The government’s upcoming budget is expected to focus on long-term economic reforms – but also things like Capital Gains Tax. The OECD has already recommended tax system reform rather than just tax hikes.
For those keeping an eye on mortgage rates, the OECD’s outlook suggests some uncertainty. The Bank of England has cut rates only once this year, lagging behind the US and Eurozone, both of which have made larger rate cuts. Traders are expecting one more 0.25% rate reduction by the end of the year, bringing the base rate down to 4.75%. However, persistent inflation may limit further rate cuts in the near future, which could mean mortgage rates remain elevated longer than previously expected.
The OECD also pointed out that more than half of the items in the UK’s consumer price index basket continue to see price increases above 3% annually, particularly in the services sector, which has been a key driver of inflation. If inflation remains sticky, it may put pressure on the Bank of England to hold rates higher for longer to meet its inflation target. Catherine Mann, a member of the Bank’s Monetary Policy Committee has already warned that we shouldn’t expect too much, too soon. “To summarise, I am concerned that structural factors underpin an unsustainable path for the UK economy with embedded and sticky services inflation to render inflation above-target for longer and, yet at the same time, stagnant real activity” she said recently after voting to hold rates steady.
In contrast to the UK’s 1.1% growth forecast, other G7 economies are seeing varying performances, with the US expected to grow by 2.6% next year, while Japan is forecasted to experience a slight contraction. These disparities suggest that the UK's economic recovery is on a solid footing, but controlling inflation will be critical to further easing of monetary policy and mortgage rates in the months ahead.
