Interest Rate Pause Leads to Hopes of Further Mortgage Reductions

Following the Bank of England’s decision to hold the base rate, industry experts comment about how the decision could impact the property and lending markets.

 
Paresh Raja, CEO of Market Financial Solutions, said: “With the Bank of England holding the base rate and house prices growing unexpectedly yesterday, there’s room for positivity to return to the property and lending markets. Following a challenging 18 months, these reasons for optimism should translate into more favourable products and rates for property buyers in the coming weeks and months.”

“Nevertheless, lenders cannot take their foot off the break when it comes to supporting brokers and borrowers who will still be feeling the harsh effects of the new higher rates environment. To help the market return to a more buoyant state, therefore, lenders must recommit to taking a proactive approach to lending – providing clarity and certainty to borrowers wherever possible, allowing them to enter the property market with confidence.”
 
Andy Mielczarek, Founder and CEO of SmartSave, a Chetwood Financial company, said: “The deciding factor in today’s interest rate decision is the floating spectre of recession – a prospect dreaded by economists and consumers alike. There are reasons for optimism, such as falling shop price inflation, but the Bank of England can only hope that holding the rate steady will ward off further decline.

“UK inflation remains the highest among the world’s rich economies, and while recent hikes may have curbed this regrettable trend, the impact on savers is considerable. Higher interest rates are intended to do more than combat inflation – they are supposed to protect Britons’ savings from losing too much of their real-term value. However, failure on the part of high-street banks to pass higher rates to consumers has left Britons worse off than they might have been.

“While the big banks are gradually catching up to the higher rates set by the central bank, the onus remains on savers to be savvy and keep their eyes peeled for the best returns if they want to protect their nest eggs. Although rates have held firm this week, Britons must act quickly to protect their savings before recent hikes are reversed and the high street swiftly follows suit.”

Lily Megson, Policy Director at My Pension Expert, said: “Today’s decision is but a brief respite for borrowers; the status quo falls far short of meeting consumer expectations for a stable financial landscape. 
 
“Inflation continues to bulldoze consumer’s purchasing power and savings. Meanwhile, ongoing discussions about the triple lock and broader economic uncertainties have left many in retirement planning feeling apprehensive.
 
“And as we approach the holiday season, the pressure to manage finances intensifies. High interest and inflation may prompt some to rethink their holiday spending plans, while others might feel they have no choice but to take on debt.
 
“Before making potentially risky financial decisions, it’s vital to recognise the value of seeking independent financial advice. In times of economic uncertainty, sound guidance can help people navigate financial complexities and make better-informed decisions to secure a positive financial future.”

 
Ben Thompson, Deputy CEO, Mortgage Advice Bureau said:
 
“Today’s hold in interest rates is good news for those with mortgage deals expiring soon, and prospective buyers looking to get onto the property ladder. Another hold is likely a sign that the Bank of England has now concluded this cycle of interest rate hikes. But we mustn’t get complacent. This could very much change in the coming months based on how, and indeed if, inflation continues to fall.

“The mortgage market has already seen drops in the swap rates used to calculate mortgage prices, and there is hope that a second consecutive pause might mean more reductions ahead for homeowners. Prospective buyers and mortgage customers will be relieved by the prospect of a steady rate, and hopefully not too distant reductions in the base rate.

“While there is hope that rates won’t rise again, there is a small chance they will, and action now could be more beneficial in the long run. This could be the sign for many homebuyers to take advantage of stable rates before there are further rises.”
 
Rob Morgan, Chief Investment Analyst at Charles Stanley, comments: “The Bank of England kept interest rates on hold today as widely expected. Cracks have been appearing in the economy and the jobs market, and many inflation indicators are moving downwards as anticipated, so the Bank can justifiably adopt a wait-and-see stance at this point.

With inflation well above the 2% target and wage growth still elevated a further rate hike cannot be ruled out in the coming months, but the more likely scenario is that we have already reached the interest rate summit and a long plateau awaits before the descent begins.

When will inflation rates start to fall?

The BoE is conscious of going too far with raising rates and inflicting more pain than necessary on the economy, but ultimately its job is to rein inflation in. Although further hikes will probably not be needed, it will likely take a prolonged period at current levels to ensure rising prices are kept in check.

The Bank will be highly vigilant of the month-on-month inflation numbers going forward, as well as the various external factors that could cause prices to veer off course. What happens next therefore comes down to inflation and economic data moving forward and whether the lagged effects of the tightening so far are sufficient to bring price rises back down.

Signs of slack in the jobs market, more stable factory gate prices and grocery price rises moderating are all trends that will please the Bank as it attempts to guide inflation back down to its 2% target. However, it will be keeping a close eye on wage data for signs of any continued strength that could exert additional upward pressure on prices. There is also the risk of buoyant oil prices and a weak sterling keeping inflation sticky, so the Bank cannot rest on its laurels.

Although a further interest rate rise cannot be ruled out, the market focus has now turned to how long rates are kept in restrictive territory. The UK’s inflation peak was higher than in other developed economies and its path back down is likely to take longer. While progress is being made buoyant wages and services inflation mean that the Bank’s 2% target is not likely to come into view until the back end of 2024. It’s therefore unlikely we will see any interest rate cuts until the second half of next year.

What does it mean for household finances?

Irradicating inflation will take more time and persistence and households must get used to structurally higher interest rates and borrowing costs than they have been used to for much of the past decade.

This will have progressively greater knock-on consequences for consumer spending as time goes by as more mortgages roll off cheap short-term fixes secured at lower rates and households incur a hit to disposable income. The housing market is also likely to come under increasing pressure into 2024 as affordability to buy or trade up becomes a broader issue amidst an era of higher rates.

Although interest rates on new mortgages have receded a bit in the past couple of months there isn’t likely to be much further relief as market expectations of a lengthy period of elevated rates have not shifted. Today’s interest rate decision doesn’t alter this view, though any commentary highlighting risks of stagnation or recession going forward may serve to shift expectations a little and temper available borrowing costs.

If markets begin to believe the Bank of England’s interest rate policy is working well, and there is scope to cut rates further and faster than currently anticipated, there may be some respite for those struggling with mortgage debt in coming months, but it could still be a difficult period for many people rolling off fixed deals secured at much lower levels two or three years ago.

For savers, the increase in interest rates has been a welcome tonic compared with the dismal returns of much of the past decade. Going forwards there is even the prospect of inflation-beating returns from cash for the first time since 2008 as inflation slowly recedes and interest rates remain elevated to ensure it does. Cash savings platforms (such as the one available through Charles Stanley Direct) are an increasingly important tool for savers to manage their money efficiently to take advantage.”