Base rate hold sparks frustration as industry turns its attention to autumn Budget
The Bank of England’s decision to hold the base rate at 4% has drawn sharp criticism from lending and mortgage professionals, who warn that the Monetary Policy Committee (MPC) has missed an opportunity to support the UK’s struggling small businesses and mortgage borrowers. The widely anticipated move, announced yesterday, comes as inflation remains stubbornly above target and the economy continues to stagnate.
Nick Smith, group managing director of Reward Funding, argued that the Bank’s hawkish approach risks stifling growth at a time when relief is sorely needed.
“Whilst we recognise the Bank of England’s cautious approach in holding the base rate at 4%, we strongly believe that this is the wrong decision,” Smith said. “A crucial opportunity to support UK SMEs has been missed, especially given the difficult economic state.”
Citing recent Office for National Statistics data showing a 5.8% fall in job openings between May and July, and an economy that “flatlined” in July, Smith warned that small businesses face “mounting operational pressures.” “A modest rate reduction would have provided much needed breathing room to ease cash flow pressures and support potential investment,” he added. With the Autumn Budget approaching, Smith urged policymakers to “place SMEs back at the heart of the UK economy.”
The Bank’s decision comes as inflation remains at 3.8% - almost double the 2% target - while wage growth has slowed and the jobs market has softened. Governor Andrew Bailey acknowledged the challenge, stating, “we are not out of the woods yet” on inflation, and signalled that any future cuts would be “gradual and careful.”
Matthew Arena, of Brilliant Group, offered a more measured perspective, noting that the mortgage market is driven less by the headline base rate and more by expectations for the future. “Of course, we love low rates but most mortgage borrowers will be paying mortgage rates based on interest rate expectations and not the current base rate. A strong Bank of England results in a more positive interest rate outlook so dropping rates 'too early' can be detrimental. Yes, the publicity of falling base rates is positive from the public's perspective but the mortgage industry is more focused on the reality, which is the longer-term expectation,” Arena said.
He added that borrowers should expect either no change or a gradual reduction in rates, describing the current environment as “relatively stable, global uncertainty aside.” For those considering refinancing or purchasing, Arena suggested, “the interest rate environment should present no reason to defer refinance or purchase activity so decisions can be made with relative confidence.”
Mark Harris, chief executive of mortgage broker SPF Private Clients, believes the persistent inflation, which is expected to rise above 4% at the next reading, means the chance of a cut at the next meeting in November is also looking less likely, especially as only two members of the Committee voted for a quarter-point cut this time around. He added that uncertainty around property taxes in the upcoming budget was causing “discretionary buyers and sellers [to take] a ‘wait and see’ approach,” and called for further rate reductions to boost both the housing market and the wider economy.
Jason Tebb, President of OnTheMarket, echoed this sense of disappointment at the decision and pointed out that the five rate reductions in the past year have been hugely welcomed by buyers and sellers, boosting confidence, easing affordability and giving much-needed impetus to the market, particularly now that the stamp duty concession has ended.
While the cost of borrowing remains at its lowest level in more than two years, mortgage rates are still much higher than they have been for much of the past decade. The average two-year fixed residential mortgage rate stands at 4.98%, and a five-year rate at 5.02%. About 800,000 fixed-rate mortgages with an interest rate of 3% or below are expected to expire every year until the end of 2027, meaning many borrowers will face significantly higher costs when they remortgage.
Jeremy Leaf, north London estate agent and former RICS residential chairman, warned that the Bank of England’s clear nervousness around further cuts means buyers and sellers will continue to hesitate. He said: “More are likely to retreat further into their shells where they were already cowering in anticipation of budget tax rises. This is even more reason for sellers to recognise the importance of keen pricing and appreciate the first offer received may be the only one.”
