"The mere prospect of a rate reduction, and the need to secure business into the pipeline after a rather subdued couple of months, has already prompted several lenders to lower their rates"
With the recent General Election behind us, attention has now shifted to the upcoming Bank of England (BoE) base rate decision on the 1st August.
While a potential rate cut might seem increasingly likely — and would certainly be welcomed by the new Labour government — it is by no means guaranteed. The latest inflation figures for June showed inflation sticking at the 2% target however in parts of the economy, notably services, prices remain persistently high.
As I write, the financial markets are estimating there is a 60% chance that the MPC will cut interest rates at the start of next month, which would mark the first reduction since 2020.
Even a 0.25% drop in BBR could have a significant impact, not only boosting economic confidence but also bolstering the mortgage and housing market, and instilling hope rates may drop further in the future.
Much like how the market grew complacent with historically low interest rates, I think some now find themselves questioning if they will ever decrease again.
Members of MPC have previously hinted a rate cut might be on the cards after inflation finally reached the 2% target in May. However, not all members are on board when it comes to reducing rates. MPC member, Jonathan Haskel, whose term concludes at the end of August, recently voiced his concerns that inflation below 2% could be just temporary.
He pointed towards a strained labour market as a potential driver of increased inflation. When labour shortages force employers to hike wages to attract and retain workers, businesses may subsequently raise prices to cover increased costs.
Haskel argues for maintaining BBR until there is greater confidence that underlying inflationary pressures and inflationary shocks from the pandemic and the Russian invasion of Ukraine have sustainably subsided.
Rates are already coming down
We may, however, still see things heat up in the mortgage market this summer — even without a rate cut. The mere prospect of a rate reduction, and the need to secure business into the pipeline after a rather subdued couple of months, has already prompted several lenders to lower their rates in recent weeks, with a potential ‘rate war’ emerging. Should the BBR indeed be cut, this could spur further competition as we see swap rates come down further.
Data from Rightmove shows that the average five-year fixed mortgage rate recently dropped below the 5% mark, now sitting at around 4.99% compared to 5.68% a year ago. Similarly, the average two-year fixed rate has fallen to 5.37% from 6.17% over the same period. For first-time buyers taking out a 85% LTV, five-year fixed-rate mortgage on a £227,757 property, this translates to monthly payments of £1,131, down from £1,203 twelve months ago.
Rightmove’s data covers 95% of lenders but excludes specialists. Moneyfacts, which includes specialist lenders, reports slightly higher averages with the average two-year fixed residential mortgage rate at 5.91% and the average five-year fixed rate at 5.49%.
Some borrowers potentially on their lender’s Standard Variable Rate (SVR) will be holding their breath for a rate reduction in the hope of remortgaging, while certain lenders may also be hoping for further drops in swap rates to maximize their lending quotas before year-end. An autumn BBR reduction, however, may not have quite the same impact.
Buyers waiting it out
The latest Royal Institution of Chartered Surveyors (RICS) Residential Market Survey paints a picture of that subdued housing market, with pent-up demand as prospective buyers adopt a wait-and-see approach.
The survey, however, shows cautious optimism, with a net balance of +20 respondents anticipating a recovery in residential sales over the next three months—up from +10 in June, marking the highest level of sales expectations since January 2022. This perhaps also indicates some optimism of an August rate decrease, as well as confidence in the new Government.
With the next rate announcement not scheduled until September 19th, following the August decision, everyone — from lenders, homeowners and potential buyers — will be watching closely to see which direction the MPC takes and how this will steer the markets in the coming months.
