Heavy gilt supply and quantitative tightening to restrain interest rate reductions
UK government borrowing costs are expected to decline only slowly over the next few years, limiting the extent to which mortgage pricing can ease, despite an anticipated shift by the Bank of England (BoE) towards rate cuts, according to new analysis by Oxford Economics.
For the mortgage market, the research suggests only modest relief in funding costs, particularly at longer maturities that anchor five- and 10-year fixed rate products. While a lower Bank Rate should provide some support, the overall rate environment is projected to remain significantly tighter than during the pre‑2022 period of ultra‑low yields.
Oxford Economics expects 10-year gilt yields to edge down through 2026 and beyond, largely as markets mark down expectations for future short-term interest rates. However, the global advisory firm argues that higher risk premia on UK government debt will restrict how far and how fast yields can fall. Those premia are being driven by a combination of heavy gilt supply, the BoE’s ongoing quantitative tightening programme, and structural changes in global demand for highly-rated government bonds.
The report also points to several domestic headwinds that could weigh on economic activity and indirectly shape mortgage market dynamics. Fiscal policy is projected to tighten steadily over the coming years. Oxford Economics estimates that measures associated with the November Budget will reduce the UK’s structural deficit by 0.7% of potential GDP in 2025‑26, and by 0.8% in both 2026‑27 and 2027‑28. That consolidation is expected to take place against the backdrop of an economy still struggling to secure a strong, sustainable growth engine, implying a relatively subdued demand environment rather than a robust upswing.
“The UK’s fiscal position remains relatively poor, and markets are being asked to digest very elevated levels of gilt issuance while the BoE continues its quantitative tightening programme,” said Edward Allenby, senior economist at Oxford Economics. “This also comes at a time when the global supply of highly-rated government bonds is increasing sharply.”
For the mortgage market stakeholders, that combination points to continued upward pressure on the term structure of interest rates, even as headline inflation falls back and base rate begins to move lower.
Refinancing risks are set to remain a central theme for the intermediary community. Over the next 18 months, a substantial minority of borrowers are due to refinance five‑year fixed‑rate loans originated before mid‑2022, when rates were significantly lower. Oxford Economics estimates that many of these customers will face a rise of 200 to 250 basis points in their mortgage rate at renewal, sharply reducing disposable incomes and reinforcing pressure on household spending.
Against this backdrop, the report implies that brokers and lenders will continue to navigate a challenging balancing act: supporting borrowers through sizeable payment shocks, managing affordability and stress testing in a weaker growth environment, and setting realistic expectations about how far mortgage rates can fall.
While a lower Bank Rate may provide some gradual relief, Oxford Economics’ analysis indicates that the structural forces driving gilt yields are likely to prevent any rapid return to the ultra‑low fixed rates seen before 2022.
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