The Bank of England is gearing up to cut interest rates next month, following a notable drop in inflation. According to the Office for National Statistics (ONS), inflation fell to 1.7% in September 2024, down from 2.2% in August. This marks the first time since April 2021 that inflation has fallen below the 2% target set by the Bank of England, which has prompted speculation about upcoming rate cuts. Many experts suggest that the Bank of England might accelerate the pace of these cuts, with some forecasters predicting a significant shift in the near future.
What Does This Mean for Mortgage Rates?
With inflation cooling, the possibility of rate cuts has increased. Experts like Paul Dales, Chief Economist at Capital Economics, believe that the Bank of England will likely announce a 0.25% rate cut in November, bringing the rate down to 4.75%. There’s even speculation about another cut in December, as the central bank navigates a cooling economy. Predictions from firms like Capital Economics and Goldman Sachs suggest that rates could decline further, potentially reaching 3% by the end of 2025 .
Despite the anticipated cuts, don’t expect a swift return to the ultra-low mortgage rates of 2021-2022. Back then, the base rate was at a record low of 0.1% due to pandemic conditions, but rates surged to 5.25% by mid-2023 as inflation spiked. For mortgage holders, any new base rate cuts will likely have a more gradual effect on fixed mortgage rates, as lenders often adjust their pricing based on long-term economic forecasts, particularly swap rates, rather than immediate changes .
Fixed or Variable: What’s the Right Move?
With market expectations indicating further cuts, borrowers might wonder if it’s better to lock in a fixed-rate mortgage now or hold out for potentially lower rates. Swap rates, which serve as a key indicator of future market expectations, show a downward trend, with five-year swaps recently at 3.8% and two-year swaps at 4.02%, suggesting that mortgage lenders are pricing in anticipated rate reductions. Yet, rates could shift quickly with changing economic conditions, so timing is crucial.
For those currently on variable or tracker rates, any upcoming base rate cuts could result in immediate reductions in monthly payments. Trackers, which adjust directly with changes in the base rate, might offer more flexibility in a falling rate environment, especially since many come without early repayment charges. Meanwhile, those nearing the end of a fixed-rate term might want to explore options now, as the market stabilises following months of volatility.
A Look Back at Rate Changes
The Bank of England’s base rate decisions over the last few years have been a direct response to economic disruptions, including the COVID-19 pandemic and geopolitical tensions like the Russia-Ukraine war, which drove energy prices higher. To combat the resulting inflation surge, the Bank increased its base rate from 0.1% in late 2021 to 5.25% by August 2023. This led to an upward shift in mortgage rates, with five-year fixed deals reaching over 4.5% at their peak.
However, as inflation eased in 2024, the Bank made its first cut in August, reducing the rate to 5%. With inflation now below target, many analysts believe that a more dovish policy approach will follow . This includes forecasts for rates to gradually drop further, although a return to rock-bottom rates remains unlikely.
What’s Next for Homebuyers?
Navigating the mortgage market during a period of rate adjustments can be challenging. While rates are expected to fall, mortgage holders should pay attention to market trends, such as movements in swap rates and the decisions of the Bank of England’s Monetary Policy Committee (MPC). As future rate cuts are gradually factored into mortgage pricing, timing will be key for those seeking to remortgage or buy a new home.
Consulting with a mortgage advisor can provide personalised insights into whether a fixed or variable rate might be best suited to your financial situation. With inflation below 2% and forecasts for gradual rate reductions, it’s important to stay informed and take advantage of favourable conditions as they emerge.
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