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Published 25 October 2023
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4 minutes

Mortgage Rate Cuts May Stall After Inflation Holds Firm

The base rate could remain unchanged for a while and slow down mortgage rate cuts after the latest official data revealed inflation is unexpectedly ‘sticky’. Here are our latest mortgage rate predictions.

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UK mortgage rate forecast for November 2023

The unexpected news that inflation in the UK held steady in September has led to predictions that the recent trend of falling mortgage rates may slow down. 

The cost of fixed-rate mortgage deals has fallen consistently since the end of July, triggered by a larger-than-expected drop in Consumer Prices Index (CPI) inflation in June. This was taken as a sign by lenders that the Bank of England’s remedy of relentless base rate rises was beginning to bring inflation under control. In turn, it was thought the rate hike cycle wouldn’t need to be as severe or prolonged as originally thought. 

However, the latest CPI data has revealed that inflation held firm at 6.7% in September, rather than dropping slightly as economists were expecting. Some financial commentators believe it could create wariness among lenders who have become accustomed to making notable mortgage rate reductions. 

“Mortgage rates will move around a little,” said Sarah Coles, head of personal finance at investment platform Hargreaves Lansdown, in an email to NerdWallet UK. “They’ve been falling slightly as lenders adjust to expectations that interest rates are likely to stay on pause for now. They may be pushed up a little by rising global bond yields, but at the moment we’re not expecting massive step changes in the immediate future. Big movements are likely to come when the market starts to forecast rate cuts – which could well take anything up to six months.”

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Fixed mortgage rates continue to fall

The better news for those watching fixed-rate mortgages is that rates continued to head lower in October, as was predicted in our previous mortgage rate forecast. It also means fixed rates generally have now been falling for the past three months. 

As an example of the difference this has made, the latest Rightmove data shows the average rate on a five-year fixed-rate deal at 60% loan to value was 4.98% on 17 October, compared to the recent high of 5.90% seen towards the end of July – a saving of more than £4,000 over the five-year fixed-rate deal on a £125,000 mortgage. 

However, the disappointment for borrowers is that similar deals were priced at an average rate of 4.12% as recently as the end of April. If a slowdown in rate cuts is on the cards, progress back towards similar levels is likely to stall too. 

Base rate hold expected… 

Even though the latest inflation figures came in higher than predicted, many feel it won’t be enough to persuade the Bank of England’s Monetary Policy Committee (MPC) to raise the base rate at the next announcement on 2 November. If the rate is left unchanged, it would be the second hold in a row, and offer further respite for borrowers with tracker mortgages and other variable rate deals who had seen their monthly repayments soar after the rate steadily increased 14 times in a row. 

“The MPC decision in November hangs in the balance a little, but overall we expect rates to remain unchanged at the current level of 5.25%,” said Barry Jones, director and head of financial planning at Watts Mortgage and Wealth Management, in an email to NerdWallet UK. “Despite inflation remaining unchanged in September, economic consensus still seems to be that the UK is on track to drop below 5.1% by December, aided by the reduction in energy price cap and slower food price growth.”

The latest official wage growth data, another economic indicator closely watched by rate setters, also appeared to give MPC members little reason to consider resuming with rate increases in November. And as Jones points out, the uncertainty created by the Israel-Hamas conflict, and the need to allow the full impact of previous base rate rises to filter through to the economy, should also come into the Bank’s thinking. 

“Further rises would seem certain to tip what appears to be a fragile economy into full-blown recession,” he added. “Certainly of note to consider would be the economic storm clouds on the horizon as fall-out from the escalating conflict in the Middle East. Oil prices have already been quietly heading higher since the summer, and any spike as a consequence of supply interruption would give the MPC some very difficult decisions ahead.”

…with first cuts forecast for the middle of 2024

Barring any signs that the economy is proving more robust than thought, Coles also expects the base rate to remain on hold in November. She reasons that “sticky inflation” alone isn’t likely to be enough to result in a rise, particularly as core inflation edged lower. The caveat is that any positive and unexpected economic news could give the Bank the option to consider a rate rise if it felt it was warranted. 

The main frustration for borrowers with variable rate mortgages, who would like to see the base rate fall sooner rather than later, is that Coles now believes there could be a longer wait before it starts to decrease. 

“Heading into next year, we’re expecting higher interest rates for longer, and we wouldn’t be surprised if it takes us until the middle of the year before we see any cuts,” she added.

Image source: Getty Images

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