The rooftop of an old red brick house in the suburbs overlooking London’s financial district.
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LONDON — Britons face the prospect of an extended period of rising mortgage rates after the government’s tax and spending budget disappointed hopes for a series of short-term interest rate cuts.
The Bank of England is widely expected to cut interest rates for the second time this year on Thursday. But prospects for a more dovish stance later look shaky after Chancellor of the Exchequer Rachel Reeves announced a £40bn ($51.41bn) tax increase and changes to the UK’s debt rules last week. It seems to be happening.
Britain’s borrowing costs soared on Thursday as investors pondered the extent of Mr. Reeves’ borrowing overhang and the secondary effects of tax increases on growth and inflation. Treasury yields have continued to rise since then, with the 10-year bond yield, which moves inversely to prices, hitting 4.508% on Wednesday.
Mortgage interest rates have also been affected by uncertainty, with many small, medium and mainstream financial institutions raising their mortgage rates in anticipation that interest rates may remain high for an extended period of time. This is despite the gradual decline in home borrowing costs following the BoE’s first interest rate cut in more than four years in August.
David Hollingworth, associate director at brokerage L&C Mortgages, said in a statement on Friday: “This is a turbulent time for mortgage borrowers as base rates are expected to fall… but fixed rates are likely to rise. ” he said.
Virgin Money became the first major lender to increase mortgage rates after the Budget, increasing rates by 0.15%. However, some banks had a different outlook, with Santander lowering interest rates by 0.36 percentage points. The average five-year fixed interest rate for home loans is currently 4.64%, down from 5.36% last year, while the average two-year fixed interest rate is 4.91%, down from 5.81% in the same period in 2023, according to the real estate portal site. Data from Rightmove revealed this on Thursday. .
“This is not the precipitous rate spike that has depleted mortgage rates over the past few years. But if funding costs do not ease, this is not the same five-year fixed rate of less than 4% that we have become accustomed to in recent months. “Interest rates may continue to be under threat,” Hollingworth continued, noting that more lenders may review their rates in the future.
later, but further on
Reeves’ fiscal reset comes at a time seen as a turning point for the Bank of England, which has traditionally taken a more hawkish approach to monetary easing than other major central banks.
Economists raised expectations that the pace of interest rate cuts would accelerate after inflation plunged to 1.7% last month and wage growth slowed. But post-Budget forecasts cast doubt on that view, with the government-funded but politically neutral Office for Budget Responsibility predicting near-term economic growth and inflation will remain high. It states that.
Alan Monks, UK economist at JPMorgan, said in a note on Monday that BoE policymakers were likely to stick to their previously laid out “gradual approach” to rate cuts. He added that interest rates could remain 50 basis points higher than previously expected at the end of the cut cycle.
As of Wednesday, the market had priced in a 97% chance of a 25 basis point rate cut on Nov. 7, bringing the bank’s key interest rate to 4.75%.
Analysts agreed that a rate cut on Thursday remained a possibility, but suggested the bank was likely to take a more cautious approach after that.
“The outlook for solid growth in 2025 likely reduces the urgency for continued rate cuts in the near term,” Goldman Sachs said in a note last Thursday. Goldman currently expects the BOE holding rate to stabilize in December, then gradually lower from February, with the bank rate reaching 3% in November.
Citi on Tuesday echoed expectations for a stay in December, citing the government’s “greater fiscal aggressiveness” as a reason for caution. Nevertheless, it added that a more “aggressive” approach is expected once Reeves’ plan takes shape, predicting continuous cuts starting in May without specifying the number.
“In our view, fiscal policy is set for a ‘one shot’ and a cautious approach in the near term still implies a more aggressive cycle of cuts to follow,” the analysts wrote. “The direction is still later, but further.” I wrote it in my memo.
