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Published 31 May 2023
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Inflation Figures Point to Mortgage Rate Rises in June

The latest UK inflation figures means interest rate predictions for June are erring towards another increase in the base rate and a rise in mortgage rates. Here are our mortgage rate predictions for June.

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UK mortgage rate forecast for June 2023

A smaller-than-expected fall in the latest inflation figures has left financial markets predicting that the Bank of England (BoE) will increase the base rate of interest again in June, and potentially lead to higher mortgage rates too.

For the third month in a row, the Office for National Statistics’ official Consumer Prices Index (CPI) reading came in higher than had been predicted. This has added weight to the expectation that the BoE will need to continue raising interest rates, and potentially leave them higher for longer, to try to force inflation closer to its 2% target.   

Unfortunately for borrowers with a tracker-type mortgage that follows movements in the base rate, the knock-on effect is likely to be another almost immediate rise in their monthly mortgage repayments. 

Of course, borrowers already with a fixed-rate mortgage won’t see an immediate increase in their repayments. However, for first-time buyers, those wanting to remortgage, and any others looking for a new mortgage deal, it seems there could be a greater chance that fixed rates will climb in the coming weeks.  

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Fixed mortgage rates already rising

If this does happen, it will continue a trend that has already become apparent throughout May, despite some predictions that fixed mortgages could continue to fall. Instead, according to data from Rightmove, the average rates on two- and five-year fixed-rate mortgages at every loan-to-value (LTV) tier it monitors have increased since the end of April.    

As a result, the typical two-year fixed rate available to borrowers with a 5% deposit or equity –  so at 95% LTV, where first-time buyers often need to look –  stood at 5.60% on 23 May, up from 5.45% around three weeks earlier. Those with larger deposits or equity have seen similar rises too, with the average two-year fixed rate at 75% LTV increasing to 4.74%, up from 4.58%, across the same period.

Although the average rates on five-year fixed rate mortgages remain lower compared to their equivalent two-year counterparts, the longer fixed-rate options have been rising by similar amounts. 

The property portal also noted that the last remaining sub-4% mortgage rates had been withdrawn by lenders, a move it said was due to increases in swap rates – which reflect the cost to lenders of funding fixed-rate deals – over recent weeks.

Further fixed rate increases predicted

One thing to note is that almost all of the rises in fixed mortgage rates approved by lenders occurred either in the week leading up to the Bank of England’s decision on 11 May to increase the base rate to 4.5% from 4.25%, or the days directly after. Significant repricing activity was then conspicuous by its absence in the week from 16 May when mortgage rates remained largely unchanged. 

The question now is whether lenders will resume raising rates on the assumption that the base rate could rise again in June. Considering this on its own, the conclusion would probably be that they will. Crucially, however, there are other factors which come into play, including how willing lenders are to compete to attract mortgage business, which could help keep rates lower. 

“Profit margins on new mortgages today are wafer-thin,” explains Stuart Cheetham, co-founder and CEO of MPowered Mortgages. “This has meant rates have been slow to increase, despite an increase in the base rate and swap rates. We are seeing lenders reprice their mortgages now, albeit slowly. Therefore, mortgage pricing has and will slightly go up in the very short term from current levels. The only counter to this is lenders’ desire to acquire market share through more aggressive pricing.” 

June base rate rise looks likely… 

At this moment in time, it seems likely that borrowers with variable and, in particular, tracker rate mortgages, which have a more direct connection to the base rate than fixed-rate mortgages, should brace themselves for further rate hike pain. The next base rate decision by the BoE’s Monetary Policy Committee (MPC) is due on 22 June and, in the immediate aftermath of the April inflation announcement, the overriding consensus of the markets and financial commentators is that the pressure is now firmly on the Bank to sanction a 13th straight rise in interest rates.

The fall in the annual CPI rate in April to 8.7%, down from 10.1% in March, was actually the largest seen since the start of the cost of living crisis. However, it won’t have gone unnoticed by rate-setters on the MPC that the figure was a notable distance from the 8.4% the BoE itself had been predicting, and even further away from the 8.2% that some economists had forecast. Also of concern will be the fact that core inflation – a reading which ignores food, energy, tobacco and alcohol prices – increased to 6.8%, up from 6.2% and a 31-year high. 

“With core inflation heading the wrong way it sets the scene for at least one more interest rate hike and, looking at market expectation this morning, it seems there’s speculation the Bank of England might go as high as a 5.5% base rate in order to complete its task,” said Danni Hewson, head of financial analysis at investment platform AJ Bell, on the day of the inflation announcement.

… although there are more figures to come  

The main reason for stopping short of saying that a further base rate increase in June is a foregone conclusion is that another set of inflation figures, for May, will be published on 21 June – the day before the next base rate announcement. Other important data around wages and the labour market will be released ahead of the next MPC meeting too.  

Some are still predicting the base rate rises of the past will see inflation fall quickly as the year progresses. However, whether it will fall far enough in May to avoid the need for a further rate rise in June, and perhaps also allow for firmer predictions over when rates could start to decrease, is the big unknown right now. 

“Inflation appears to be stickier than we first thought, and June appears to be no different,” says Cheetham. “It is clear the Bank of England will continue to use the central base rate to fight inflation, and as such we’re not expecting to see a reduction in the rate anytime soon. It is likely that we will be waiting until the first half of next year for a drop, but the hope is the drop in the base rate will see product and mortgage rates drop in turn.”

Image source: Getty Images

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