That's it for 2024 rate cuts – Barclays

Looking for a cheeky Christmas present for clients? It's not going to be a BoE cut…

By Matthew Sellers

11 Nov 2024

Major mortgage lender Barclays has adjusted its outlook on the Bank of England’s next move – it says it’s now expecting the central bank to keep rates steady in December instead of cutting rates again. This shift in the bank’s opinion comes following recent signals from the Bank of England that highlight economic uncertainties following the recent US election, Labour’s new tax-and-spend budget and a preference for cautious, gradual policy adjustments.

The Bank of England recently reduced the base interest rate to 4.75% from 5.00%, marking its second rate cut of the year after a previous reduction in August. However, with inflation still posing a challenge, the central bank has said that any future cuts are likely to be incremental rather than aggressive.

“The main messaging from the press conference was repeated emphasis on the extent of uncertainty at the current juncture: uncertainty around the impact of the fiscal package; uncertainty on the current state of the labour market...," Barclays noted.

"Despite big spending increases in last week's UK budget, the Bank of England has signalled that it's not a game changer for future interest rate cuts," ING economist James Smith agreed. "We think the Bank will keep rates on hold in December but accelerate the pace of cuts from February onwards."

Inflation is still the big focus for the central bank. Recent data gave us good news and showed the UK’s Consumer Price Index (CPI) dropping to 1.7% in September from 2.2% in August, the lowest level since April 2021. Unfortunately, Reeves’ budget then happened and inflation is projected to rise again. The Bank of England has predicted that the budget could add nearly half a percentage point to inflation at its peak, extending the timeline for inflation to sustainably return to the target of 2%.

Barclays highlighted that, given these inflationary pressures and the bank’s commitment to a “gradual” approach, the current level of uncertainty will likely prevent another rate cut in December. Instead, Barclays expects that the Bank of England will hold off on further cuts until February 2025, when a series of gradual 25-basis-point reductions could begin, potentially bringing the base rate to 3.50% by the end of next year.

The recent rate cuts have offered some relief for mortgage holders. UK Finance reports that the latest 0.25% cut translates into average monthly savings of £28.98 for homeowners on tracker mortgages and £17.17 for those on standard variable rates.

Nicholas Mendes, mortgage technical manager at broker John Charcol, noted that this decision aligns with similar rate reductions seen in other European countries, including those by the European Central Bank and Sweden’s Riksbank.

However, Mendes cautioned that the base rate alone doesn’t directly determine mortgage rates. Lenders consider additional factors, including swap rates and funding costs, when setting their rates. Although lower base rates often create downward pressure on mortgage costs, the market’s anticipation of such cuts can lead to adjustments in mortgage rates well before the actual policy changes take place. “A drop in the bank rate doesn’t necessarily result in an immediate reduction in mortgage rates across the board,” he explained.

Looking forward, Mendes projects that mortgage rates may continue trending downward towards the end of the year, with fixed rates potentially settling in the low 3% range in 2025. Such a reduction could stimulate buyer confidence, encouraging more activity from first-time buyers and homeowners considering moving. Mendes anticipates this increased demand could result in rising property values, with property prices projected to climb by approximately 5% next year.

The next Bank of England policy meeting, scheduled for December 19, may provide further insight into the central bank’s approach. With the government’s recent budget likely to fuel inflation, Barclays suggests that any further delays in rate cuts could necessitate a more accelerated reduction cycle next year.