A hold - and not bold.. the Monetary Policy Committee plays it safe
For an all too brief, intoxicating moment it seemed that a Bank of England base rate cut might be coming, with hopes heightened following an encouraging update on inflation from the Office for National Statistics. But the UK’s annual inflation rate dipping slightly to 3.4% in May, down from 3.5% the month before, wasn’t enough to persuade the Bank’s Monetary Policy Committee from a bold move, in a downward direction.
It wasn’t to be. The BoE has kept interest rates on hold at 4.25 per cent, and the plethora of interest rate cuts anticipated for 2025, will have to wait for the second half of the year… possibly.
David Hollingworth (pictured left), associate director of L&C Mortgages isn’t surprised. “The recent tone has again been one of a more cautious, slow and steady approach,” Hollingworth commented. “Although borrowers will be disappointed not to see another cut this month it's widely expected that there will be further movement this year. Weaker growth figures will maintain that expectation. There will, however, be concerns around the impact of rising oil prices and uncertainty due to conflict in the Middle East.” He added: “Mortgage rates seem to have found a level for now but with a degree of uncertainty never far away it looks like borrowers will continue to pick up a deal and hope that they may be able to improve on it at a later date.”
For Nicholas Mendes (pictured second from left), head of marketing at London broker John Charcol, the Bank’s move – or a lack of one - speaks to an increasingly muddled backdrop facing policymakers. “Headline inflation held steady at 3.4% in May, as falling fuel and air fare prices were offset by stickier components elsewhere,” he noted. “But beneath the surface, the picture is still sticky. Services inflation, a key measure the Bank keeps a close eye on, eased to 4.7%, still some way off the 2% target. Core inflation held firm too, coming in at 3.5%.
“Wage growth remains strong, and although the jobs market has started to cool with unemployment nudging up to 4.6%, there is not yet enough to convince the Bank that underlying inflationary pressures have been fully contained. Then there is the global picture. The threat of fresh energy shocks, particularly if tensions in the Middle East escalate further, adds another layer of risk the Bank cannot afford to ignore.”
Markets still expect a cut or two later this year, acknowledges Mendes - and possibly as soon as August. “For now, the MPC is sitting tight, and that feels like the sensible choice,” he said. “The outlook for mortgage holders in 2025 remains finely balanced. Even in a falling rate environment, borrowers would be wise not to wait passively.”
Paresh Raja (pictured second from right), CEO of Market Financial Solutions, points to the fact that when it cut the base rate in early May, the MPC strongly indicated that further cuts would follow. “Economic and political landscape, both in the UK and globally, continues to evolve at pace – pronounced turbulence and uncertainty made a hold almost inevitable,” he reasoned. "But we should see the bigger picture. The base rate is 0.75% lower than it was ten months ago, and a gradual decrease is still expected in the coming year. The challenge right now is to ensure inertia doesn't set in within the property market while would-be buyers wait for further cuts. We have to unlock buyer demand right now.
“Lenders cannot afford to dwell on decisions from Threadneedle Street, and should focus on what they can control. With the prospect of multiple rate cuts in the second half of this year now fading, it’s vital that lenders continue to adapt their products and offerings in line with borrowers’ needs. If they can do that, investors should have the confidence to execute their plans, helping to unlock activity across the market despite the higher-rate environment.”
Meanwhile, Adrian Sutcliffe (pictured right), sales director at Heron Financial, commented: “Despite some wanting to see further cuts in the base rate, to encourage growth in the face of recent contractions in the economy, this should also be balanced with the immediate impact that broader geopolitical events in the Middle East may have on inflation. The conflict between Israel and Iran will see an increase in the price of oil, creating upward pressure on inflation, and this will no doubt be at the forefront of the BoE’s thinking. Given the balancing act needed, a hold of rates probably seems a sensible choice.”
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Borrowers may be unsettled
John Phillips, CEO of Just Mortgages, believes a ‘changing narrative’ around interest rate expectations and the number of cuts isn’t entirely helpful and goes some way to unsettle borrowers. “We can take comfort that the consensus is still that interest rates will be cut,” he noted. “While careful and gradual is fine to a point, especially given the bigger picture at play, an economy on life support requires some clear action and hopefully that will mean more than one cut later in the year. It will improve affordability, drive homeownership and deliver economic growth.”
There are still plenty of positives to be taken from the BoE’s decision, according to Ben Thompson, deputy CEO of Mortgage Advice Bureau. “It’s good to look at how far we’ve come, with the current base rate being the lowest we’ve experienced since May 2023,” Thompson said. “We can still anticipate cuts later in the year, although how soon these will arrive remains to be seen.”
The chief executive of mortgage broker SPF Private Clients, Mark Harris, cannot hide his lack of surprise at the decision, and is focused instead on how the MPC voted. “With only a two-way split in voting this time around - three members voted for a quarter-point reduction while six voted for a hold - this is encouraging, suggesting that another reduction could come at the August meeting. However, with the Bank opting for a cautious approach, it has missed a real opportunity to be bold by cutting rates again. This would have sent out a strong message, helping boost the housing market and wider economy, particularly now that the Stamp Duty concession is no longer available.
“There is some good news for borrowers though in that lenders have reduced mortgage rates and eased criteria in recent weeks. This rate hold was largely expected by the markets but if swap rates fall, this will enable lenders to price their fixed-rate mortgages more keenly, easing borrowers’ affordability concerns. We expect the MPC to continue on the anticipated path for base rate with further reductions in coming months but what can’t be guaranteed is where rates end up, nor the pace it takes to get there."
Many first-time buyers will be disappointed by the delay in cutting the base rate, unsurprising through it is, suggests Andrew Gall, head of savings and economics at the Building Societies Association. “Since 2020, mortgage repayments for new homebuyers have risen by around 30%, now accounting for 22% of income, meaning affordability is a major barrier to homeownership,” commented Gall. “Building societies continue to find innovative ways to support aspiring homeowners, providing almost 37% of first-time buyer mortgages last year. However, more flexible mortgage regulation is also needed to give lenders more opportunity to offer real help.”
Steve Cox, chief commercial officer at Fleet Mortgages, summed up: “It’s understandable the MPC is choosing to proceed with some caution. It’s important to note, however, that in the buy-to-let market and other mortgage product sectors, pricing is not generally dictated just by movements in bank base rate, and we’ve seen a continued fall in swaps having a bigger impact. We’ve recently made a number of reductions to our buy-to-let product rates, and will continue to look at opportunities to continue this. Improved affordability, greater remortgage potential, and renewed portfolio investment are all on the table. This hold does not stall that progress, it simply reinforces the importance of acting strategically and taking advantage of funding opportunities as they are presented.”
