Industry experts debate whether it might put paid to an August interest rate cut?
Hopes that the Bank of England would lower the base rate at its next meeting in August have been dealt a blow, with latest figures from the Office for National Statistics showing that the UK’s annual inflation rate climbed to 3.6% in June. Speculation is now rife that the Bank may remain cautious and not make a cut. Inflation rose from 3.4% the month before, with The Consumer Prices Index (CPI) showing a 0.3% increase on a monthly basis, compared to a 0.1% rise in June last year. But how much of a difference could this make to the next BoE decision – and, ultimately, mortgage borrowers?
David Hollingworth (pictured left), associate director at L&C Mortgages notes that the general anticipation had been that the rate of inflation would remain steady in June, so the increase is an unwelcome surprise. "That will raise the question of whether it’s enough of a surprise to force the Bank to consider a delay to any further cuts in base rate" he said. The recent tone has been consistent in its suggestion that interest rates should continue to fall but it’s been harder to be sure when those cuts may come, when data doesn’t follow the expected path.”
The Bank’s focus is on reducing the rate of inflation to its target of 2% but it may still see enough reason to reduce rates in the August meeting, Hollingworth suggested. “Many economists will suggest that inflation should still ease over the course of this year and that weak economic growth and a potentially looser labour market leaves the path open to rates continuing the downward trajectory,” he commented. “Mortgage rates have been reflecting the market’s confidence in more cuts to come, as lenders have been quick to take advantage and trim back fixed rates. Lenders have been locked in an attritional rate battle that has seen frequent albeit small reductions made to fixed rate mortgage pricing.”
The latest inflation update could take a bit of momentum out of those reductions but may not be enough to make a major reversal in those mortgage rate improvements, he added. “However, with recent changes in regulatory approach, lenders will have more flexibility when offering higher multiple mortgages and that is already feeding through into lender criteria,” Hollingworth explained. “That and the promise of further rate cuts should still give mortgage borrowers room for optimism but today’s unexpected data is a reminder of just how hard it is to second guess where rates may head.”
While inflation has gone up, specialist mortgage adviser specialist mortgage adviser Amar Dhanota (pictured second from left), from London-FS, doesn’t believe it is enough to stop a rate cut in August, although she acknowledges that speculation suggests otherwise. “We are seeing the mortgage market moving nicely now, with lenders reducing rates, which is what both new borrowers and existing borrowers need for sure" she said. Reductions in the base rate will provide a life line for many mortgage holders.”
What, then, would Dhanota do to address the UK’s ongoing financial difficulties, if she was in Rachel Reeves’ shoes. “I think I would not be making any drastic changes and would actually sit back and rethink, looking at what has been done, what can be seen and listen to the real life impact on businesses, people and the economy from those changes and actually whether things need to be put back to what it was before or improved,” she said.
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Rate changes can be unpredictable
Dan Gracie (pictured second from right), specialist lending director at Panthera Finance LLP, notes that in his 19 years as a mortgage broker, he has learned not to spend too much time thinking about where rates might go, putting his my efforts instead into working with what the industry has. “Not out of laziness or ignorance,” Gracie added, “but more because I’ve realised that the Bank of England base rate rarely does exactly what people expect it to. In our profession, we are not licenced to predict the future of interest rates but to advise our clients based on their financial position and their attitude to risk. And that’s what I focus on. If I have a client who wants to see where rates go, I’m happy to wait with them; and if I am working with someone who fears change and wants immediate stability, I’ll try to secure them a fixed rate as soon as possible.”
Anticipating the next MPC meeting, he reasoned: “If the Monetary Policy Committee see the recent inflation rise as a blip or a knee-jerk reaction then it may not be enough to stop a much-anticipated drop in August. However, if they view it as the start of a trend then I think it may be enough for them to pause any adjustments to the base rate until they’ve seen where inflation goes.”
Meanwhile, Gerard Boon, managing director of Boon Brokers, is concerned about the inflationary figures. “A slight rise in the inflation rate suggests that businesses across the UK are responding to recent tax rises by passing those increased costs onto consumers in their pricing,” he said. “For mortgage borrowers, this inflation news means that they are less likely to see the Bank of England cut their base rate at the next Monetary Policy Committee meeting. I believe that mortgage interest rates are likely to stabalise if not increase slightly over the next month as a result.”
Due to this unexpected increase in the inflation rate, Boon doubts the Bank of England will reduce the base rate on August 7th. “If this is true, mortgage borrowers may need to wait until September 18th, for the next MPC meeting, until the base rate is cut further,” he observed, “although, this is only likely to occur if the inflation rate falls on track to achieve the Bank of England's 2% inflation target.”
Matt Coulson (pictured inset, above), founder of brokerage Heron Financial, believes the latest inflation uptick complicates the outlook for mortgage borrowers. “I believe rate cuts this year are still inevitable,” he said. “Inflation is largely a global issue rather than specific to the UK, and policymakers should consider the broader context when deciding on interest rates. Supporting businesses further is crucial, as economic stability relies heavily on thriving enterprises and confident consumer spending.” He added: “If I were Chancellor, I'd prioritise targeted support for businesses alongside the expected gradual rate cuts, ensuring we maintain progress on inflation without stifling economic growth.”
