"Base Rate will be cut at a more moderated pace than previously expected and has been priced in by lenders. Therefore we are likely to see average mortgage rates drift up a little in the short term, before starting to fall back again."
- Rightmove’s mortgage expert, Matt Smith
Earlier today, the Bank of England announced that its Monetary Policy Committee has voted 8–1 to reduce Bank Rate from 5% to 4.75%, the second reduction in three months.
However, despite falling interest rates, industry experts explained why mortgage rates "could increase in coming weeks".
Peter Stimson, head of product at MPowered Mortgages, commented: “Anyone hoping that the Bank’s decision would instantly open the floodgates to cheaper mortgages is likely to be disappointed. In fact the mortgage rates offered both to new borrowers and remortgagers could even increase in coming weeks.
“There are two reasons for this. The first is that today’s Base Rate cut of 0.25% had widely been seen as a certainty, which financial markets have been pricing in for weeks.
“The second is less obvious. The swaps market - which is essentially the wholesale cost of fixed rate money that lenders offer out as mortgage loans - has been rising since mid-September.
“Several lenders have even been offering mortgages at below the swap rate just to win business. Longer term, this position isn’t sustainable and mortgage rates will need to rise to reflect the current position of fixed rate money.
“Whilst today's Base Rate cut is welcome, it’s unlikely to be the turning point prospective buyers have been hoping for.
“Looking ahead, rates are likely to tick down slowly, rather than tumble, given the increasing divergence between fiscal and monetary policy.
“The Bank’s Monetary Policy Committee meeting noted that consumer inflation is likely to jump back up above its 2% target at the end of the year - suggesting that a further Base Rate cut next month may be off the table and a slower, more watchful ‘wait and see’ approach for 2025.
“With both the UK and US Governments now appearing intent on adopting policies which, to a greater or lesser extent, are inflationary, central bank monetary policy is finding itself on a collision course as it attempts to cut interest rates while gilt and swap rates are rising.
“This tension will be an interesting one to watch, and the path to further rate reductions next year is unlikely to be smooth.”
David Hollingworth, associate director at L&C Mortgages, said: "Good news for borrowers as the widely anticipated cut brings the base rate to 4.75%, dropping back below 5% for the first time since June last year. That helps continue the downward trajectory for interest rates, which is expected to continue into next year.
"However, focus will be on whether the mood has changed in terms of how sharply rates might fall and whether the path may not be as steep or fall as far as previously expected.
"Most borrowers have continued to fix their rates to benefit from the lower rates they offer when compared with variable rate deals. Counter intuitively those fixed rates have been nudging upwards despite the cut to base rate, as the market perception of the inflation and rate outlook has shifted.
"Last week’s budget and the US election have added a hint of uncertainty around future rate movements. That has already caused a flurry of price changes to feed through with most resulting in fixed rates being hiked.
"That is likely to continue unless markets are reassured by today’s decision and funding costs ease back. In the meantime, lenders will continue to readjust their rates to find the right balance and the level at which the market will settle."
Rightmove’s mortgage expert, Matt Smith, added: “This Base Rate decision comes at the end of a run of important macro-economic and political events on both sides of the Atlantic. All of this has resulted in a view that Base Rate will be cut at a more moderated pace than previously expected and has been priced in by lenders. Therefore we are likely to see average mortgage rates drift up a little in the short term, before starting to fall back again.”
