The UK’s recent budget announcement has sent ripples through the financial markets, significantly impacting mortgage rates and altering expectations for future interest rate cuts by the Bank of England (BOE). While a rate cut is anticipated this Thursday, the government’s substantial increase in taxes and altered debt rules have introduced uncertainty, leading many to predict higher mortgage rates for a longer period than previously projected. This shift affects not only borrowers but also the broader UK economy, potentially influencing growth and inflation in the coming months.
Key Takeaways: UK Mortgage Rates and the Budget’s Impact
- The UK government’s £40 billion ($51.41 billion) tax increase and revised debt rules have created uncertainty in the financial markets.
- Despite an expected interest rate cut by the Bank of England this Thursday, forecasts for subsequent cuts are now less certain.
- Mortgage rates are rising for many lenders, reflecting the increased uncertainty and the expectation that interest rates will stay higher for longer.
- While the average fixed mortgage rate is still down from last year, the recent increases signal a potential reversal of recent downward trends.
- The Bank of England is now likely to adopt a more cautious approach to rate cuts, potentially leading to higher interest rates for an extended period.
The Impact of the Budget on Mortgage Rates
The UK government’s recent budget, featuring a substantial £40 billion ($51.41 billion) increase in taxes, has introduced considerable uncertainty into the market. This fiscal policy change has led to a dramatic shift in market expectations regarding future interest rate cuts by the Bank of England (BOE). While the BOE is expected to cut interest rates this Thursday, the impact of the budget’s increased borrowing and potential inflationary pressure on growth has dampened optimism for a series of rapid, near-term interest rate reductions.
Consequently, several lenders, including Virgin Money, have already responded by raising mortgage rates. Virgin Money increased rates by 0.15%, a move that reflects the increased risk and cost of borrowing in the new financial environment. In contrast, other banks, such as Santander, have chosen to reduce rates by 0.36% indicating a differing perspective on the market conditions. This divergence shows the complexity of current market conditions and the varied response of different institutions.
Although the average five-year fixed mortgage rate currently stands at 4.64% (down from 5.36% last year), and the two-year fixed rate is 4.91% (down from 5.81% in 2023), the recent trends suggest a potential reversal of the generally downward trend in recent months. David Hollingworth, associate director at broker L&C Mortgages, aptly summarized current sentiment: “It’s confusing times for mortgage borrowers when expectation is for a base rate cut … but fixed rates look set to rise.“
The Uncertain Future for Mortgage Borrowers
The uncertainty surrounding future interest rate cuts has created immense concern among mortgage borrowers. While recent months have provided some relief with gradually declining borrowing costs, the recent market shifts caused by the budget have cast a shadow of doubt. The possibility of sub-4% five-year fixed rates, once considered attainable in the near future, are now under threat.
Market analysts are largely in agreement that further increases in mortgage rates will likely occur unless funding costs ease. The market is expecting a cautious approach from lenders, anticipating further volatility should the current trends continue. This underscores the importance of careful financial planning and advice for individuals looking to secure or refinance mortgages in the coming months.
The Bank of England’s Response: A More Cautious Approach
The government’s fiscal statement has significantly altered the outlook for the BOE’s monetary policy. Economists originally anticipated a faster pace of rate cuts following a sharp drop in inflation to 1.7% and easing wage growth. However, the Office for Budget Responsibility, a government-funded independent body, now predicts higher near-term economic growth and inflation, directly influencing expectations for future rate cuts.
Analysts are therefore expecting the BOE to adopt a more cautious, “gradual approach” to rate cuts, revising their predictions for the end of the cutting cycle. Allan Monks, J.P. Morgan’s UK economist, suggests interest rates could now remain 50 basis points higher than previously anticipated. This shift reflects a significant realignment of the central bank’s strategy in response to the budget’s impact on the overall economic outlook.
Market Predictions and Analyst Forecasts
Markets are currently pricing in a 97% chance of a 25 basis point cut on November 7th, bringing the BOE’s key rate to 4.75%. While a cut this Thursday largely remains in the realm of expectation, analysts foresee the BOE taking a more cautious approach going forth. Institutions like Goldman Sachs and Citi predict that the BOE will hold rates steady in December, with subsequent cuts potentially beginning only in February or May, depending on the economic circumstances and the ultimate “bedding in” of Reeves’ budget plans.
Despite the anticipated delay in more substantial rate cuts, the consensus among analysts is that a more aggressive approach will likely be adopted once the consequences of the budget’s policies become more fully realized. Citigroup, for instance, suggests that the government’s fiscal stimulus is a “one-shot game,” meaning that a more active cutting cycle will eventually be needed. In short, the prevailing sentiment is “Later, but further“—pointing towards more drastic cuts happening at a later date but ultimately resulting in more overall reductions.
The outlook is not entirely gloomy however. While the uncertainty caused by the budget has made some markets more hesitant, the overall trend of decreasing inflation and easing wage growth remains. The BOE’s cautious approach is a reaction to this current instability, rather than an indication of impending economic doom. As the effects of the budget continue to unfold, it will be essential to watch the subsequent actions of the BOE and the broader adjustments in the financial market in order to maintain a clear and accurate picture of what the future entails for homeowners.
