Mortgage rates are not expected to fall below 4 per cent in the near future, experts have warned, despite a drop in inflation and a predicted cut to interest rates next month.
The latest inflation figure for December showed that price rises have unexpectedly slowed to 2.5 per cent, down from 2.6 per cent in November. Most economists had expected a hold or a small rise.
This has led to traders now betting on more base rate cuts in 2025, with future markets largely expecting the Bank of England to lower rates by 25 basis points to 4.5 per cent in February’s meeting.
However, inflation is still above the Bank’s 2 per cent target and experts still believe it will still rise over the year, adding mortgage rates are still forecast to increase in the immediate future.
They have been gradually rising this year as swap rates, which underpin the pricing of fixed-rate mortgages, have edged upwards and are increased by increases in the cost of government borrowing.
Virgin Money upped rates by 0.2 percentage points today whilst Co-op is increasing fixed rates by 0.59 percentage points on Thursday (16 January).
This will cause a further headache for the Chancellor Rachel Reeves and the Labour Government who promised to ease bill pressures for households across the country.
Keir Starmer has made how much extra money people have in their pocket to spend a key measure of his Government.In December he set out six targets his Government should be measured by under his Plan for Change. One of these was to improve living standards – to be measured by real household disposable income.
Nick Mendes of brokers John Charcol said: “It is likely that rates on two-year and five-year fixed mortgages will remain broadly stable, albeit with slight increases in the most competitive deals as lenders adjust to market conditions.
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Read More“At present, the prospect of sub-4 per cent rates returning seems remote unless there is a significant shift in monetary policy or market conditions. Borrowers should be prepared for rates to stay above this level.”
The average two-year fixed rate is 5.49 per cent while the average five-year deal is 5.27 per cent, according to Moneyfacts.
David Hollingworth of brokers L&C said: “There’s no room for cuts below 4 per cent at the moment and I think that it’s currently more likely that we will see more rates stabilise or even continue to edge very slightly higher as the market adjusts to the volatility.
“That could change over time but too early to expect a return of sub-4 per cent rates in the current climate.”
The disappointing news comes despite economists telling The i Paper that the fall in inflation will lead to the Bank of England’s Monetary Policy Committee (MPC) cutting the base rate in February.
Sanjay Raja, chief economist at Deutsche Bank, said: “The Bank is likely to feel emboldened to continue its easing cycle in February. And rate cut expectations further out should ease on the back of today’s data.”
Ruth Gregory, deputy UK chief economist at Capital Economics, added: “While a lot of the surprisingly large fall in services inflation from 5 per cent in November to 4.4 per cent in December was due to a very sharp fall in airfares, underlying price pressures still appear a bit more favourable than we had thought.
“That strengthens the case for a 25 basis points interest rate cut in February and lends some support to our view that rates will fall further and faster than markets expect.”
Some economists believe there could be multiple cuts this year, despite recent forecasts suggesting there would only be a couple following higher government borrowing figures.
Any cut in interest rates will be a boost to the Chancellor who is pinning her hopes on growth in the economy in order to avoid the politically painful decision of having to raise taxes or make deeper cuts in order to balance the books.
Although a February cut that fails to lower mortgages could arguably come to late to alter the need for a mini-Budget in March if high gilts – government borrowing costs – wipe out the Chancellors £9.9bn headroom.
Tomasz Wieladek, chief economist at T. Rowe Price Group, said: “The data today will support MPC members who are convinced it should continue to cut.”
He predicts the Bank will cut the bank rate four to five times this year, “significantly more than market pricing.”
Yael Selfin, chief economist at KPMG UK, is expecting three cuts this year – in February, May and November.
She said: “The pace of cuts will likely remain slow as the Bank assesses the second-round effects from the Budget. Nonetheless, we think markets are under-pricing the number of cuts we’ll see this year, with inflation expected to moderate in the second half of the year. We expect the MPC to continue easing policy over 2025, taking base rates down to 4 per cent by the end of the year.”
However, other economists still believe that rates could stay higher than previously expected over 2025.
Monica George Michail, associate economist at NIESR, said: “The upcoming Trump presidency has heightened global uncertainty and inflation expectations. Therefore, although we expect the MPC to gradually cut rates in 2025, we think the Bank will remain cautious, and rates may remain higher for longer.”
Martin Sartorius, the Confederation of British Industry’s principal economist, added Rachel Reeves’s hike in employers’ national insurance would contribute to inflation remaining “elevated” this year, despite December’s slight fall.
He said: “Looking ahead, we expect inflation will stay elevated this year, partly due to autumn budget measures contributing to higher prices.
“Persistent, above-target inflation supports our expectation that the MPC will loosen policy at a gradual, quarterly pace throughout 2025.”
In response to better than expected inflation, and in more hopeful news for Reeves, gilt yields, which reflect UK borrowing costs have fallen in response to the inflation data, falling by around 9 basis points for two-year bonds, in a sign there is a recovery rebound, at least in the short term.
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