Rising inflation, a shrinking economy and geopolitical factors could scupper a rate cut
With inflation rising again and the economy shrinking, hopes are not high for a base rate reduction when the Bank of England’s Monetary Policy Committee meets this week, but never say never, and nothing is certain until its decision is announced.
The UK’s annual inflation rate rose to 3.5% in April, up from 2.6% in March, according to figures released by the Office for National Statistics (ONS), and the Chancellor, Rachel Reeves, admitted she was disappointed last week when the ONS also confirmed that our economic output had shrunk by 0.3%. The much anticipated succession of rate cuts predicted for 2025 has seemed an ever more distant prospect. Certainly these are not the greatest set of financial circumstances to be considered by the MPC, when it gathers on Thursday, and it face concerns over factors such as the Middle East conflict, which has flared up again. Even so, some brokers are still keen to see the rate cut that they believe could light a touch paper under the mortgage market.
“I’m very much in favour of a cut,” said Luther Yeates (pictured left), head of mortgages at Orton Financial. “The Bank of England, and the MPC, need to think very carefully about what type of economy they want to have under their stewardship. The economy is shrinking, employment is falling, and businesses are being strangled by increasing employer taxes, coupled with extremely high borrowing costs. If their intention is to drive the economy into stagflation, then they are on track to be on the honours list 2026. Otherwise, they need to take charge of the situation and start trimming the base rate. A cut of 0.5% would send a clear message they are relaxing control and wish to create an environment of growth. If they do nothing, we know a great broker who can assist with relocation overseas.”
Graham McClelland (pictured second from left), CEO of lender Gen H, notes that the market expects a rate hold, with a couple more rate cuts to come this year. “I'd agree this is the likely outcome,” McClelland said. “Inflation is higher and stickier than the MPC would like. However, I would like to see a rate cut. Part of that is pure self-interest - it would make for lower rates and more affordable mortgages. I think an unexpected cut would result in swaps falling and swaps drive mortgage pricing. The other part of this is that I think it is the right thing to do. I believe that we are over the hurdle in terms of structural inflation and I think we do damage by waiting to see this filter through to the headline inflation rate.” He added: “We are constantly hearing that the UK needs more private and public sector investment - making a move in interest rates now would definitely help.”
Serena Smith (pictured second from right), adviser at Mortgages with Serena, notes that the MPC faces a difficult juggling act. “What it should do and what we all feel personally don’t always align with the economy and what is best for that,” reasoned Smith. “We all want the 1 to 2% back for our mortgages but would love 10% for our savings. What is right for one might not be for another. I know I’ve felt this myself receiving emails to say lenders are reducing rates and wanted to do a happy dance, then receiving the blow that savings rates are reducing. And also, having to amend and amend takes time as a broker.”
Read more: Brokers on current mortgage market trends
Message is mixed for borrowers
David Hollingworth (pictured right), associate director at L&C Mortgages notes that the Bank will likely leave the rate unchanged at 4.25%. “There will be plenty that will be hoping for another cut to the base rate, to add to the two reductions made already this year,” Hollingworth commented. “Although the ongoing trend for interest rates should continue to be down, borrowers have faced ongoing uncertainty around how quickly those rate cuts are likely to come. The messaging and market expectation around the speed that cuts may come has continued to move, as global news has lurched from one story to the next. That mixed message of quick/slow cuts and the consequent impact on mortgage rates dropping, then edging higher again, will hardly act as a boost to borrowers’ confidence.” He added: “We will of course see where inflation figures are headed, but the escalating conflict and impact on oil prices may only affirm a steady approach this time round. This is consistent with the Bank’s line of determination to only ease monetary policy once it feels inflation is sustainably under control.”
Gerard Boon (pictured above, inset) recognises that a reduced base rate would be welcome in the mortgage market, to stimulate demand and ultimately reduce retail interest rates for borrowers. “I doubt that will come to fruition,” Boon said. “The country's inflation rate is still volatile and above the Bank of England's 2% target, therefore, I expect the base rate to remain at 4.25%, unless the inflation rate falls fairly significantly. Sadly, with job losses on the rise in the UK, the country could really do with stimulated demand for economic growth, but the Bank of England will prioritise its inflation rate target."
The recent run of poor employment and GDP figures will be giving the Bank of England cause for concern, agrees Bob Singh (pictured above, inset), director of Chess Mortgages, but he indicates that a cut isn’t out of the question. “Labour’s policies have hammered public and business confidence as many struggle to make ends meet,” Singh said. “The Monetary Policy Committee know they’re looking down the barrel of a recession and need to act decisively to avoid such an event by cutting base rate by 0.5%. Small cuts are no longer having the desired effect.”
Mortgage adviser Michelle Lawson (pictured above, inset), director of Lawson Financial, notes that external geopolitical influences such as the escalation of the conflict between Iran and Israel could have a bearing, but she believes the Bank should cut the rate this week. “I think it should come down, to put more money back to business and public pockets,” Lawson commented. “Finances are at strangulation point and people can only do so much. Inflation may go up as a result but it is a balance. By people paying out less there is more reason for people to hire and spend more, which puts more tax back into the system.”
A rate cut could be a retrograde step though, warns Louis Mason (pictured above, inset), head of marketing at mortgage adviser and protection specialist, Oportfolio. “While a rate cut would offer short-term relief for mortgage holders, a premature move could reignite inflationary pressure,” Mason said. “The Bank should stay the course a little longer, signal its direction, but hold off until data confirms a more durable trend. The housing market needs stability more than volatility, in my opinion.”
Specialist mortgage adviser Amar Dhanota (pictured above, inset), from London-FS, commented on the base rate: “It does need to come down for sure,” suggested Dhanota. “However I think they will hold it in the meeting this week. There is still a lot of uncertainty in the markets and given the current economic climate, the monetary committee will want to be cautious. It will most likely be a split vote, but I think we will need to see what happens over the next few months, and a possible cut in August.”
And Matt Coulson (pictured above, inset), founder of Heron Financial, believes the MPC should maintain the status quo – for now.
“The MPC is now facing a tougher than expected spike in CPI, so that three and a half per cent read that we got for April, which was driven a lot by increasing utility bills, etc, but there are underlying pressures in services inflation and they are still really apparent,” Coulson said. “As a result of that I’d probably hold rates for now, but I think the most important part here is that they do signal their intent and signal a clear path to rate cuts and effectively employing some of that forward guidance that Mark Carney was so fond of, during his time as a governor. I think what that might do is actually build as much confidence as a cut itself, and it would give the industry an urgent boost that we need.” He added: “We do need to continue this downward momentum in base rate generally, and that will build up confidence for buyers and sellers and hopefully support those homebuyers for the second half of the year if we do get that signal of intent for August.”
